South Africa for more pain in coming months: Investec

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The US Federal Reserve’s decision to raise interest rates by 75 basis points on Thursday (June 16th) boosts the likelihood of larger rate hikes in South Africa, Investec Chief Economist Annabel Bishop said.

Bishop said the move in U.S. interest rates boosts the likelihood of a 50 basis point hike instead of a 25 basis point hike by the Reserve Bank of South Africa in July, although the curve South Africa’s FRA points up to 75 basis points, she said.

“Currently, we continue to expect a 50 basis point increase in South Africa’s repo rate from the Monetary Policy Committee meeting in July, with the Reserve Bank of South Africa likely to follow the direction, but not necessarily the exact movements of the Federal Open Market Committee (FOMC), which has risen in consecutive increments of 25 bps, 50 bps and 75 bps so far this year.

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The central bank’s decision could be made more difficult as economists forecast South African inflation could top the 6% level for the first time in five years on Wednesday.

“After remaining flat at 5.9% year-on-year in April, we expect inflation to pick up to 6.1% in May, which is in line with the consensus forecast,” the Bureau of Economic Research said on Monday. (BER) in a research note.

“It would be the first time since March 2017 that inflation has breached the upper limit of the South African Reserve Bank’s inflation target range – although the May print is still not the peak.”

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These inflation numbers, which are not unique to South Africa, are expected to reverberate in global markets as central banks consider raising rates to bring them under control. In South Africa, inflation reached 5.9% in April 2022.

Rand weakness

Bishop added that the rand is currently expected to average 15.80 rand/dollar in the third quarter of 2022, but that could change as Ukrainian President Volodymyr Zelensky has warned against the intensification of the Russian invasion, and the NATO now warns that the war could drag on for years, offering no end in sight to related price pressures.

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“Sanctions against Russia are expected to persist longer than expected, further supporting high agricultural and energy commodity prices. Russia and Ukraine account for one third of world wheat production and two thirds of sunflower production.

“The risk is that the U.S. economy will slow faster than its policymakers and markets anticipate, with a recession, and not necessarily a mild one, spooking markets as stagflation deepens due to stubborn pressures on prices on the supply side, weakening the rand,” she said.


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