© Reuters. FILE PHOTO: A view shows the South African Reserve Bank logo at the Reserve Bank’s offices in Pretoria, South Africa on January 26, 2023. REUTERS/Safiwe Sibeko
By Cubano Gombe
JOHANNESBURG (Reuters) – South Africa’s central bank is likely to extend its tightening cycle and push interest rate cuts in the future amid nationwide power outages and currency weakness, adding to inflationary pressures that are straining businesses and households, analysts said.
The South African Reserve Bank (SARB) – which is facing a dilemma of how to control inflation without further stifling already weak economic growth – has raised its key lending rate by 425 basis points since November 2021.
But inflation continues to rise.
The next interest rate decision will be made on Thursday, and the majority of economists polled by Reuters last week expect a 25 basis point hike to 8.00%.
But some analysts, such as Nicolaie Alexandru-Chidesciuc of JPMorgan (NYSE: NYSE), have ramped up their forecasts, now expecting the bank to raise 50 basis points and predicting that the first rate cut won’t come until 2024.
“The risk of exacerbating blackouts as well as geopolitical concerns after the US ambassador claimed the country did not act in an unbiased manner in the Russia-Ukraine conflict has weighed heavily on the currency,” Alexandru Chedisciuk said.
The outlook for South African policymakers is at odds with central banks in other developing economies, many of which are running the US Federal Reserve on hiking courses and preparing to deliver cuts in the coming months.
This provides comfort at a time when growth problems are gripping the world’s two largest economies – the US and China. Among the major emerging markets, only Israel and Colombia have raised interest rates recently. Hungary kicked off its first policy facilitation course in Europe on Tuesday.
Serb Bank Deputy Governor Rashad Qassem, in an interview with Reuters on May 3, acknowledged that raising interest rates is unpopular in a low-growth economy, but said the priority is managing inflation expectations. The annual consumer price inflation rate is more than 7%, above the central bank’s target range of 3%-6%.
“We want to ensure that the low exchange rate and (high) food prices do not permeate other parts of the inflation basket,” Qassem said.
“If we do nothing, (consumer’s) income will erode more and more. So maybe some of the initial pain could benefit consumers in the medium to long term.”
South Africans were already facing price hikes after COVID-19 and the Ukraine War disrupted supply chains. And the electricity crisis has added to the pressure, as companies, including food producers and retailers, spend more on alternatives such as diesel generators and pass the costs on to consumers.
The central bank estimates that power outages – which can last up to 10 hours a day – will add 0.5 percentage point to headline inflation in 2023.
A weaker rand of more than 10% this year is making imports more expensive.
“With significant rand weakness and significantly higher production and retail costs from (the power outage), the risk to inflation expectations at equilibrium remains to the upside,” said Annabelle Bishop, chief economist at South African Investec Bank.
“We expect a 50 bps hike on a balanced basis to be more likely … rather than a 25 bps hike.”
Economists said that demand for credit is rising as household incomes have not kept pace with prices, and that higher borrowing costs could increase indebtedness.
The new credit card default rate in the fourth quarter increased 20% year-over-year, while the mortgage default rate increased 19%, according to the Eighty20/XDS Credit Stress Report.
said Koketsu Mano, chief economist at African lender FNB South Africa.