SARB likely to hold rates next week, says Bank of America

SARB Governor Lesetja Kganyago is to deliver a decision on interest rates next Thursday. Picture: Oupa Mokoena/ Independent Newspapers

SARB Governor Lesetja Kganyago is to deliver a decision on interest rates next Thursday. Picture: Oupa Mokoena/ Independent Newspapers

Published Nov 17, 2023


Bank of America (BofA) has reversed its previous call that the South African Reserve Bank (SARB) will hike interest rates next week on the back of easing oil prices while other local financial institutions are forecasting another hold.

This comes as the SARB’s Monetary Policy Committee (MPC) will hold its final three-day meeting for the year next week, with the decision on interest rates to be delivered on Thursday.

The SARB kept the rates unchanged at 8.25% per annum in the last two MPC meetings in July and September, albeit with hawkish tones, since it last hiked the rates by 25 basis points in May.

Interest rates decisions in South Africa are mainly driven by the movement in consumer inflation and the rand exchange rate for that specified period.

BofA said yesterday that the SARB was likely to keep rates higher for longer before moving for a cut to the policy rate next year, as inflation was expected to moderate on an oil price fall.

BofA’s sub-Saharan Africa economist, Tatonga Rusike, said the SARB was likely to be cautious on hikes, especially if data was supportive of keeping rates unchanged.

Rusike said the 20% oil price spike had been largely reversed by mid-November as Brent crude oil prices fell towards $80 (R1 514) per barrel, from a peak of $96 at the end of September.

He said that big reversal was a positive to the inflation outlook as these changes also translated into a nominal decline in local fuel prices.

Rusike said if all other factors held constant, the consumer price inflation should fall back to 5% from its current 5.4%, level which is towards the upper limit of the bank’s 3-6% target range.

“We are reversing our call for a SARB hike at the November 23 meeting. New risks, particularly oil prices, have pulled back the 20% spike from late August into early October. Year-end inflation of 5% and a policy rate of 8.25% is more than a 3% positive real rate – enough for SARB to remain on hold, in our view,” Rusike said.

“We now expect the SARB to stay on hold at the November meeting and in the first half of 2024. We think it’s likely to keep rates higher for longer. We see the next move as a cut to the policy rate.

“We forecast cuts of a cumulative 50 basis points in 2024, starting in July, and 75 basis points in 2025.”

Rusike also pointed to the rand exchange rate and the US Federal Reserve (Fed) as some of the factors that will be considered by the MPC in its rates decision.

The rand has been very volatile, moving in an R18.80/$1 to R18.20/$1 range alone this week on changing expectations around US interest rates, which are expected to have peaked in their current cycle.

Global financial markets remain highly sensitive to the US interest rate cycle, and fluctuating expectations add to rand volatility.

The US Federal Reserve delivered a dovish hold at its November meeting, but BofA’s US economics team views the Fed as done with hiking and the cutting cycle will begin from June 2024.

BofA is forecasting the US dollar /rand averaging about R18 in 2024, with a likely best level of R17.50 in the third quarter, but the Fed cutting cycle would add to dollar weakness and support the rand strength.

Meanwhile, Investec chief economist Annabel Bishop said the US inflation report was seen to reduce pressure on the US monetary authorities to increase interest rates again, and this would also be positive for South Africa.

Bishop said markets had already begun factoring in an end to the US interest rate hike cycle, and have increased risk appetite, which includes the purchase of emerging market portfolio assets.

“This indicates no need for an interest rate hike in South Africa next week, and we do not expect one, particularly given the recent appreciation in the rand. However, the SARB will likely evince a hawkish tone overall,” Bishop said.

“The focus, however, is on the US and its incoming economic data, particularly inflation and jobs data, while market players are building up their appetite for risk-taking, with further rand strength expected as no further US interest rate hikes occur.”