Interest rates in South Africa are poised for lift-off, but the South African Reserve bank (SARB) is reticent to provide guidance.
South Africa should prepare for interest rate hikes given the rising inflationary pressures and global energy shortage currently unfolding.
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To arrive at South Africa’s neutral level of interest rates, 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, lifting the repo rate to roughly 6.5%. Whether the MPC follows the guidance of the model remains to be seen.
The MPC is scheduled to meet mid-November to decide on the fate of the current levels of interest rates. While the MPC continues to express agreement via their unanimous vote count to keep rates on hold, they convey divergence in their informal forward guidance for rates.
SARB Governor Lesetja Kganyago has indicated his preference for targeting the lower end of the inflation band, or 3% – 4.5%, saying that higher inflation begets higher interest rates, and vice versa. He would like to adopt structurally lower national interest rates going forward.
Targeting an inflation level of 3% and setting interest rates accordingly could filter into the real-world economy via some mechanisms.
Rental agreement escalations often bake in the targeted inflation number. Employers will set their wage agreements to escalate at 3%, which will inform the additional spending power of consumers each year. This will feed into 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 members of the MPC continue to anchor around higher guidance – asserting that inflation at 4.5% with a 2% real uplift (which is enjoyed by savers) implies interest rates at 6.5%.
Locally, our insufficient national energy supply is perhaps too great a structural impediment to South Africa realising permanently lower inflation and rates. Adding to the complexity is the many inflationary factors outside of the MPC’s control, such as ambitious US spending packages, the potential for a global energy shortage, the rising cost of food and labour, and a developed world transition to decarbonisation utilising more expensive green energy. Multiple supply shocks that persist for longer than expected are harder to look through.
The MPC’s quarterly projection model is programmed to align with such thinking, but what is telling is that the model is no longer charitably referred to by the governor as a “trusted additional member of the committee” – he now maintains that he will not outsource the role of the SARB to a mere forecasting tool.
Rates will need to rise from current levels, and the lifejacket offered to indebted consumers will begin to deflate, meaning the beginning of better interest rates for savers. That said, some members of the MPC continue to highlight that they do not want to damage the fragile economic recovery by pre-emptively raising rates. Either way, monetary policy is a blunt instrument that cannot address economic nuances like the collapse of the hotel and leisure industry. In terms of how aggressive the rate hiking cycle will be, and where rates ultimately land, we will have to wait and see.
Thalia Petousis, fund manager at Allan Gray
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