Aggressive rate hike expected after inflation disappointment

South Africa’s central bank is poised to extend its most aggressive rate-hiking cycle in at least two decades on Thursday, underscoring its commitment to tame stubbornly high inflation even as the economy flirts with a recession.

The median of 19 estimates in a Bloomberg poll of economists is for a 75 basis point increase, with expectations ranging from 50 to 100 basis points. The vote split prediction tends to have three MPC members supporting a three-quarter-point move, with two panelists favoring a half-point increase.

Appointments starting in a month and used to speculate on borrowing costs rose to show traders are now fully pricing in at least a 50 basis point tightening this week. That’s after headline and core inflation, which excludes food, soft drink, fuel and electricity prices, accelerated in October.

READ | Inflation in October surprises with jump to 7.6%

“If the headline and core are upside surprises, it suggests you simply have more inflation resilience,” said Gina Schoeman, economist at Citibank South Africa. The South African Reserve Bank will now be even more concerned about the second-round effects of inflation, she said.

Source: Momentum Investments

The central bank is officially targeting price growth in a 3% to 6% range, although its monetary policy committee prefers to anchor expectations near the middle of that range. Upturn risks to the outlook, heightened uncertainty and domestic price pressures mean policymakers may have yet to raise interest rates to levels “consistent with stable and lower inflation,” an October policy review said.

However, breakeven rates, which signal inflation expectations, have fallen, with the five-year mark at 5.27% — near the lowest level since February.

A 75 basis point hike would bring the reference rate to 7% – a level last seen more than five years ago when the MPC tried to bring inflation back below the 6% ceiling of its target range.

Further upside will tighten real interest rates, potentially making local assets more attractive to foreign investors.

Complicating matters for Governor Lesetya Kganyago are economic growth concerns – there is a possibility the economy slipped into recession in the third quarter – and the deteriorating global outlook. South Africa’s record power outages this year have increased domestic risks.

Given the recent shift towards less aggressive rate hikes by some central banks, Kganyago’s speech will be watched for signs that the Reserve Bank is on the verge of slowing the pace of its rate hikes or even halting the cycle.

The bank is likely to adopt a cautious tone and not commit to a pivot until it is confident that inflation will return to the 4.5% target median over its forecast horizon, said Jeffrey Schultz, chief Middle East and Africa economist BNP Paribas, in a note. The published forecasts of the MPC currently run until 2024.

“We expect the Reserve Bank to remain firmly in risk management mode and aim to build buffers for an increasingly uncertain global and domestic economic outlook,” he said.

The bank has frontloaded rate hikes to fight inflation, with the benchmark already close to the 6.36% level its model is forecasting for the end of next year. Kganyago has repeatedly said the model is a broad policy guide.

The decision will be announced during a televised briefing beginning at 3 p.m. Thursday. Kganyago will also provide the voting breakdown and updates to the MPC outlook including for inflation, interest rates and economic growth.

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