Neo Ralefeta

Neo Ralefeta

Neo Ralefeta | Treasury Structuring

We can see the peak...

The current global inflation and interest rate market has experienced notable developments, and South Africa has been no exception. Inflation, the sustained increase in the general price level of goods and services, has been a pressing concern for the South African economy, prompting policymakers to act.

The good news now is that the world seems to be moving into a disinflationary environment where prices are still increasing but at a slower rate, and it is now expected that central bankers may stop hiking interest rates – although it is expected that central bankers will continue talking tough, to anchor inflation expectations.

Core inflation, a measure that strips volatile items such as energy, food and fuels seems to be coming off much slower, and central bankers are keeping a very close eye on how this measure behaves going forward.

There’s been some debate, both globally and in South Africa, about whether central banks should have increased interest rates as aggressively as they did or whether they should still do so going forward.

Looking North-East from South Africa, there are interesting lessons to be learnt from Turkey and perhaps other economies that did not respond quickly to the threat of high inflation, where the independence of central banks appears to be compromised. In something that looked like part of an election campaign gone wrong, the Turkish central bank decreased interest rates when the rest of the world was gearing to fight inflation, causing a currency crisis and spiking inflation to a 24-year high of 85.1%.

This decimated household savings and Mr. Erdogan’s lost his popularity among the electorate. To make up for it, Mr. Erdogan increased the public sector wage bill by something close to 45% five days before the presidential election. Shortly after the recent election where President Erdogan extended his two decades of power, sanity prevailed and the central bank of Turkey increased interest by 6.50% to 15% and is expected to increase rates again by another 6% to 21%. Despite this, Turkey’s economy was able to grow, however, I am not certain that the South African economy would be able to handle such shocks.

South Africa has faced a combination of structural and cyclical factors that have contributed to rising prices. Structural issues, such as electricity supply constraints and high unemployment rates, have limited productivity and economic growth, putting upward pressure on prices. Cyclical factors, such as exchange rate volatility, volatile food and fuel prices, and administered price increases, have further contributed to inflationary pressures.

To address these challenges, the South African Reserve Bank (SARB) plays a crucial role in managing inflation through its monetary policy decisions, particularly by adjusting interest rates. The SARB's primary mandate is to keep inflation within its target range of 3-6%. In response to rising inflationary pressures, the SARB has adopted a hawkish stance, gradually raising interest rates. Since November 2021, the repo rate has increased by 4.75% points to 8.25% as of July 2023. These rate hikes aim to curb inflation and anchor inflation expectations.

However, the tightening monetary policy stance poses challenges for South Africa's economic recovery. Higher interest rates have increased borrowing costs for businesses and consumers, slowing down investment and consumption. Additionally, the rate hikes may put pressure on households with high debt levels, reducing their disposable income and impacting domestic demand. Moreover, South Africa's inflation dynamics are closely intertwined with other factors, such as currency movements and global commodity prices.

Yesterday, the US headline inflation number came out at 3% from 4% in the previous period, exciting the market across interest rates, foreign exchange, commodities and equities. The rand strengthened is looking set to break into the 17.000s/$ trading level today and the probabilities of and any further interest rate hikes in South Africa have waned significantly.

Going into South Africa’s inflation print and SARB interest rate announcement next week, it is expected that inflation will print within the target band and that the SARB will hold the Repo rate at the current level of 8.25%.

With inflation now expected to land within the SARB’s target levels and the ZAR strengthening, we may be very close to the peak of the interest rate hiking cycle and perhaps should be grateful that we are not in Turkey.