Interest rates in South Africa are approaching their peak, Nedbank economists say, but they’re not there yet – and the risks are very much to the upside, opening the door for even more hikes than expected this year.
This means middle class South Africans – who are already heavily indebted with home loans, vehicle loans and credit – will be paying even more to service their debts in the first half of the year.
The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) will be meeting next week for the first time this year to deliberate on the next move for interest rates in South Africa. The MPC will deliver its decision on Thursday, 26 January.
Coming off the back of elevated inflation locally and rate hike cycles in major economies, the consensus among economists and analysts is that there is still room for rate hikes in South Africa – though they differ on the quantum and the pace.
Nedbank’s economic unit forecasts a hike of at least 50 basis points (bps) in the first quarter of the year – 25bps in January and 25bp in March – with the prime lending rate likely to peak at 11%.
“Given the evidence of fading global inflationary pressures, the downturn in domestic inflation, weaker domestic growth prospects, and the US Fed’s decision to take a less aggressive monetary policy stance, we believe that interest rates are near the peak in this cycle,” it said.
Another view, from Investec chief economist Annabel Bishop, is that next week’s rate hike will be more aggressive up-front, with a 50bps hike out the door.
Managing director for private clients at Efficient Wealth, Dr Francois Stofberg, said that interest rates in the country will most likely increase by 50bps to 75bps in 2023, but may also start to decline by the end of the year.
Unlike Stofberg, Nedbank said that it doesn’t see much room for rates to come down in 2023, noting that many of the risks that would be factored into such a decision are working against it – most notably inflation.
“We do not expect any rate cuts later this year due to the upside risks to the inflation outlook. If inflation proves stickier than we expect, the MPC could raise interest rates to a higher peak,” the group said.
Inflation numbers for December 2022, published by Stats SA on Wednesday (18 January), showed that consumer price inflation eased to 7.2% for the month, in line with market expectations.
While inflation remains high – and far outside the 3% to 6% target range set by the SARB – it is at the lowest point in nine months, and expected to drop further.
“We forecast inflation to ease further off a high base throughout 2023, averaging around 5.5% for the year. In addition to base effects, downward pressure will come mainly from transport and food prices,” Nedbank said.
“We expect further cuts in petrol and diesel prices as global oil prices recede, pulled down by subdued global demand. Prices of most food items will also trend lower, reflecting the lagged effect of falling global prices and improved supply chains, while a better summer harvest will contain local prices.”
However, risks to the inflation outlook remain on the upside, emanating mainly from the global oil price, the vulnerable rand and administered prices, particularly electricity tariffs, the bank said.
“Global oil prices could rise from the current lower levels as the OPEC+ cartel decided to continue cutting oil production by 2 million barrels per day until the end of 2023 to support the oil price, which is under pressure from slowing global demand.
“Meanwhile, the National Energy Regulator of South Africa granted Eskom permission to increase electricity prices by 18.7% this year. While this was lower than the 32% hike the power
utility wanted, it will still be a significant contributor to inflation. These factors could cause inflation to remain high for longer or recede at a much slower rate,” Nedbank said.
The overarching message from market commentators around the Nersa-approved increase is that the electricity price hike will undoubtedly push up costs for households and businesses in the country, which will lead to inflationary pressure in an environment of already elevated prices.
The Bureau for Economic Research (BER) warned this week that if the inflation outlook moves higher, the Reserve Bank will be forced to hike rates even more in response.
“Rising inflation expectations may, for example, lead to higher wage demands as workers feel they need to be compensated for the expected rise,” the BER said. “If demand is robust enough, some businesses may adjust their prices increases further upwards.”
To prevent higher expectations from becoming a reality, the SARB may be forced to increase the interest rate, the BER said.
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