Brace for another big repo rate hike, even as inflation softens

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Statistics South Africa is expected to deliver another softer inflation reading this week, but this will probably not be enough to temper the South African Reserve Bank’s hawkishness.

Analysts have forecast a slightly lower inflation number for October, with consensus expecting it to hit 7.4% year-on-year — down from 7.5%. If they are right, it will mark the third consecutive retreat and back up the view that inflation peaked in July.

In the 12 months before July, inflation had continued to climb amid pandemic and war-related global supply chain disruptions. But global recession fears have since weighed on once elevated commodity prices, causing inflation to come down.

Even though domestic inflation has seemingly peaked, analysts do not expect the Reserve Bank to change tack after having implemented six consecutive repo rate hikes since last November. 

The repo rate, which affects the cost of borrowing, is now only 25 basis points below its pre-pandemic level of 6.5%. And, with consensus forecasting another 75 basis point hike at this week’s monetary policy committee (MPC) meeting, the repo rate is set to come in at 7%. 

Some, including Investec’s economists, are expecting an even more aggressive 100 basis point repo rate hike this week. This is as high inflation remains a concern, especially in advanced economies, where central banks have maintained their hawkish tilts.

The rand has had a very weak run in the past three months, which will inevitably factor into the MPC’s decision-making this week. 

As the Bureau for Economic Research points out, the rand is trading at a softer exchange rate than assumed at the September meeting, when the MPC’s implied starting point for the rand forecast was R16.91 to the dollar. 

The rand is now on track to average R17.50 to the dollar in the fourth quarter of 2022, according to Investec chief economist Annabel Bishop. This is after the domestic currency averaged R18 to the dollar for the first six weeks of the quarter.