Rand weakness and inflation worries: What’s ahead for SA’s repo rate?

Although the next meeting of the Monetary Policy Committee only takes place in November, economists have already expressed their concern the repo rate may be increased due to higher inflation after two meetings where it was left unchanged.

The weak Rand is not signalling good news for inflation and the Monetary Policy Committee (MPC) determines the repo rate based on the inflation rate. The target of the South African Reserve Bank (Sarb) is to keep inflation between 3% and 6%, but closer to the midpoint of 4.5%.

The Bureau for Economic Research (BER) at Stellenbosch University says the sustained losses for the rand – which lost another 3% against the US dollar last week – reinforced the concerns raised previously about a deteriorating near-term domestic inflation outlook.

“With this in mind, there is a rising probability that the MPC will increase the repo rate by another 25 basis points to 8.50%, which will push the prime rate to 12% at its next meeting on 23 November. This view is also informed by the fact that there were already two out of five votes for a 25 basis points increase at the July and September MPC meetings,” Hugo Pienaar, BER chief economists, says.

“Even considering the near-term inflation challenges, the November policy interest rate decision is unlikely to be unanimous amid the first batch of South African activity data for September that supported our call for a stall in real GDP growth momentum during the third quarter.”

He says in addition last week’s more than 10% plunge in the oil price to below $85/bbl also removed some of the anxiety about the inflation outlook.

“While the risk of another Sarb hike in November has risen materially, it is not a foregone conclusion.”

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Oil price expected to rise again

However, Pienaar adds, last week’s sharp oil price decline may be short-lived after the dramatic events over the weekend when Palestinian militant group Hamas launched the biggest attack on Israel in decades, killing several hundreds and taking many others hostage.

“The renewed and severe escalation in the long-running feud between Israel and Hamas has the potential to turn into a regional Middle East conflict that potentially involves major oil producers like Saudi Arabia and Iran,” Pienaar warns.

This concern then also saw the Brent crude oil price trade almost 4% higher at around $88/bbl in Asia this morning, while gold was trading 1% higher at 6 am after the uncertainty created by the weekend events.

Prof. Jannie Rossouw, visiting professor at the Wits Business School, says while it is still unclear why the attack happened and how long the war will be, it is difficult to say what the impact for South Africa will be. However, he expects it to affect the oil price, which will in turn affect inflation if fuel prices increase.

Prof. Bonke Dumisa, an independent economist, says inflation already increased from July, when it was 4.7% to 4.8% in August and there were massive fuel price increases in September and October.

“I believe the two fuel price increases in September and October will push inflation above 5%, although it is likely to remain within the 3-6 percent target inflation rate range. Under these circumstances it is possible the MPC may decide to hike the repo rate by 25 basis points from 8.25% to 8.50%, given that at the September meeting they voted three against two to keep it unchanged.”