Tuesday, January 18

Can we expect an interest rate hike in November?

Interest rates in South Africa are poised to take off, but the South African Reserve Bank (SARB) is reluctant to provide guidance.

South Africa should prepare for interest rate hikes given the mounting inflationary pressures and the current global energy shortage.

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To reach the neutral level of interest rates in South Africa, the quarterly projection model used by the Monetary Policy Committee (MPC) implies a rate hike in November 2021 and at each meeting in 2022 and 2023, raising the buyback rate. to about 6.5%. It remains to be seen if the MPC follows the model’s guidance.

The MPC is scheduled to meet in mid-November to decide on the fate of current interest rate levels. While the MPC continues to express its agreement through its unanimous vote recount to keep rates on hold, it conveys divergence in its informal forward-looking guidance for rates.

SARB Governor Lesetja Kganyago has indicated his preference for targeting the lower end of the inflation band, or 3% to 4.5%, saying that higher inflation begets higher interest rates, and vice versa. You would like to adopt structurally lower domestic interest rates in the future.

Aiming for a 3% inflation level and setting interest rates accordingly could leak into the real world economy through a few mechanisms.

Lease escalations are often based on the inflation target number. Employers will set their salary agreements to increase to 3%, which will report the additional purchasing power of consumers each year. This will fuel demand, which in turn will influence prices. The mindset of the economy shifts to expect lower inflation and, as with many things in life, it is those expectations that can become self-fulfilling.

However, other MPC members continue to be anchored in higher guidance, stating that inflation at 4.5% with a real increase of 2% (enjoyed by savers) implies interest rates at 6.5%.

At the local level, our insufficient national energy supply is perhaps too great a structural impediment for South Africa to achieve permanent lower rates and inflation. Adding to the complexity are the many inflationary factors beyond the MPC’s control, such as ambitious US spending packages, the potential for a global energy shortage, rising food and labor costs, and a transition of the developed world towards decarbonisation using more expensive green energy. . It is more difficult to analyze the multiple supply shocks that persist for longer than expected.

The MPC’s quarterly projection model is slated to align with that thinking, but what is telling is that the governor no longer charitably refers to the model as a “trusted additional committee member”; it now maintains that it will not outsource the SARB’s role as a mere forecasting tool.

Rates will need to rise from current levels, and the life jacket offered to indebted consumers will begin to deflate, signaling the beginning of better interest rates for savers. That said, some members of the MPC continue to stress that they do not want to damage the fragile economic recovery by raising rates proactively. Either way, monetary policy is a blunt instrument that cannot address economic nuances such as the collapse of the hotel and leisure industry. In terms of how aggressive the rate hike cycle will be and where they will ultimately land, we will have to wait and see.

Thalia Petousis, Allan Gray Fund Manager


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