South Africa

Despite South Africa’s decision to raise interest rates, the rand and economic growth remain unclear

Economic forecasters do not anticipate the South African Reserve Bank’s monetary policy normalization to be a smooth ride.

By a quarter-point, the South African Reserve Bank (SARB) raised its main repo interest rate to 3.75 percent from its record low of 3.25 percent. There was an increase in the central bank’s consumer price index prediction for 2021 and 2022 from 4.4 percent to 4.5 percent, respectively.

The Monetary Policy Committee divided its vote 3-2, suggesting mixed feelings inside the SARB as it seeks to promote the economy while addressing inflationary concerns, notwithstanding the decision to raise interest rates.

In October, the headline CPI inflation rate was just 0.2 percent month-on-month, while the year-over-year rate was 5 percent.

Short-term inflation is in danger from rising oil and energy costs, according to SARB Governor Lesetja Kganyago.

It was a surprise to many analysts that the repo rate was raised sooner than anticipated by Absa, according to Jeff Gable, head of macro and fixed income research. This was a sign of the bank’s worry about inflationary concerns. However, for the time being, forecasts remain close to the SARB’s aim.

After Jerome Powell’s reappointment as Federal Reserve chairman, the South African rand was traded at 15.9 to the US dollar in the fourth week of November, its lowest since November 3, 2020, because of a stronger dollar and fears about new European trade limitations. For these reasons, many Forex traders are now beginning to trade with a relatively strong currency – the USD. As a consequence, many South African brokers for trading suggest individuals to invest in strong currencies in order to keep their customers safe and avoid going bankrupt. For the first time in three years, the South African Reserve Bank raised its benchmark interest rate to 3.75 percent. Inflation is also expected to rise in 2021, 2022, and 2023, whereas growth is expected to be somewhat lower in 2021. In addition, the country’s economic future is being threatened by continuous difficulties.

According to Gable, the Reserve Bank has been “talking harshly about inflation throughout the cycle” because “tens of millions of disadvantaged South Africans are not really in a position to defend themselves from inflation.”

A hike in interest rates sooner than anticipated “is obviously an indicator that they want to keep on top of it,” says a financial analyst.

A Methodical Approach To Hiking

Whether or if the SARB’s accommodating posture is gradually unwound over the next several years is still up in the air according to Gable, who said that the market may be on edge every time the MPC meets.

Forizs, an economist at Capital Economics, said in a report that the decision signals a slower tightening cycle than markets had expected.

To maintain inflation expectations “fully anchored” and to “moderate the future path of interest rates,” Kganyago indicated that the MPC considers that “a modest hike in the repo rate would be adequate.”

Following the ruling, the rand was initially weaker versus the dollar because of its dovish tendency, Forizs noted.

It is likely that the monetary policy of the MPC members will continue to be accommodating in order to assist the economy.

Over the following two years, Capital Economics expects the repo rate to rise by 150 basis points, reaching 4.5 percent by the end of 2022 and 5.25 percent by the end of 2023.

Forizs, on the other hand, emphasized that the market is now pricing in increases of 250 basis points over the next 18 months.

Growth Outlook

So far, the economy’s rebound has been bumpy. Over the last two years, covid lockout tactics and pockets of civil unrest have had an impact on activity.

Even while the SARB still predicts annual GDP growth of 5.3% in 2021, it has drastically reduced its projections for 2022 and 2023 from 2.3% to 1.7% and from 2.4% to 1.8% respectively.

More than that, the government has been fighting for years to enact fundamental economic changes. Infrastructural, labor, public sector pay, and privatization

The ANC’s internal disagreements have created a “logjam” that has made development impossible, according to Gable.

It’s expected that tensions will rise and that demand for change will be ratcheted up. But there’s still a worry about where the agreement is on how to go in the larger transition process.

In light of increasing core bond rates, JPMorgan reduced its position in the South African rand to “underweight” from “middleweight” on Friday.

“In South Africa, 2021 was essentially ‘good news’—we expect higher risks in 2022, with FX being the most vulnerable,” JPMorgan emerging markets analysts said in a report.

For example, they pointed out that the rand has risen to its highest level versus the dollar this year due to less support from terms-of-trade, which measures a country’s export prices against its import prices. On Friday afternoon, the value of the dollar was 15.73 rands per dollar.

JPMorgan predicts that the current account, which measures a country’s imports and exports of commodities and services, would continue to decline through 2022.

An all-time high of 343 billion rands ($21.8 billion) in current account surplus was reached in September as a result of increased commerce and record exports of goods.

While Gable recognized that the country’s current account surplus represents a powerful tailwind, he disagreed with this assessment.

Despite the fact that the global economy may be moving against developing countries, “that should give, generally, support for the rand.”

Over the following two years, Absa predicts a steady depreciation of the rand, commencing at “somewhere in the early 15s to the dollar” towards the end of 2021.

 

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