South Africa’s central bank, the South African Reserve Bank (Sarb), is expected to continue its tightening cycle and delay rate cuts due to countrywide power outages and currency weakness. Analysts predict that the bank will hike its main lending rate by 25 basis points to 8.00% in its upcoming decision. However, some analysts, like Nicolaie Alexandru-Chidesciuc at JPMorgan, believe that a 50 basis points hike is more likely and anticipate the first rate cut to occur in 2024.
The country’s inflation rate remains high, and Sarb is facing a challenge of curbing inflation without further hampering the already weak economic growth. In response to this dilemma, Sarb has increased its main lending rate by 425 basis points since November 2021. However, inflation continues to pose a problem.
Several factors contribute to the current situation. The risk of worsening electricity cuts and geopolitical concerns following remarks by the US ambassador regarding South Africa’s alignment in the Russia-Ukraine conflict have significantly impacted the currency. These factors, combined with disruptions caused by the COVID-19 pandemic and the Ukraine war, have led to rising prices and supply chain disruptions, putting pressure on businesses and households.
Sarb Deputy Governor Rashad Cassim emphasized the importance of managing inflation expectations, despite rate hikes being unpopular in a low-growth economy. Annual consumer price inflation is above the central bank’s target range of 3%-6%, currently standing at over 7%. Cassim highlighted the need to prevent the impact of a depreciated exchange rate and high food prices from permeating into other areas of the inflation basket. He suggested that some initial pain may benefit consumers in the medium to long run to prevent further erosion of consumer income.
Rolling blackouts, lasting up to 10 hours a day, are estimated to contribute 0.5 percentage points to headline inflation in 2023, according to the central bank. The depreciation of the rand by more than 10% this year has made imports more expensive, further exacerbating inflationary pressures. Rising prices and higher borrowing costs could increase indebtedness among households, as credit demand continues to rise while incomes struggle to keep up with prices.
The rate of new defaults on credit cards and home loans has seen significant increases, reflecting the financial stress faced by consumers.In contrast to South Africa, many other developing economies’ central banks have preemptively raised rates in anticipation of actions by the US Federal Reserve and are preparing for rate cuts in the near future.
This divergence provides some relief amid concerns about the economic growth of the US and China, the world’s top two economies.Overall, the current situation in South Africa calls for balancing the need to curb inflation with the desire to stimulate economic growth.
Sarb faces the challenge of addressing inflationary pressures caused by various factors, including power outages and currency weakness, while considering the impact on businesses and households. The decision on whether to hike rates further or initiate rate cuts will have significant implications for the economy and consumers in the coming months.
