In July, the South African Reserve Bank (SARB) will hike interest rates as inflation threatens to hit the upper ceiling of the target set up by the central bank.
The hike in interest rates is five months earlier than previously thought. In a recent poll of over 20 economists, it was suggested that the Reserve Bank of South Africa will raise interest rates to 6 percent in July, up 25 basis points. The survey also disclosed that a more sustained and quicker breach of the target inflation was seen by economists and is expected to average 6 percent in this year’s last quarter and be above the target in Q1 next year.
The Reserve Bank of South Africa expressed concerns last month that expectations about inflation were anchored at the top end and pressures could be tamed with even small rate hikes.
The central bank has its focus on keeping inflation between 3-6 percent but the bank is under pressure to hike interest rates due to upward pressure from more increases in the levels of expensive crude and electricity prices. Inflation is expected to average nearly 4.9 percent this year and 6.1 percent next year. The central bank ruled out any rate cut in the coming few months primarily because of mounting inflation pressure despite prospects of poor economic growth.
Gina Schoeman, an economist at Citi, said we see the next SA’ repo rate hike in July of 25 basis points. Schoeman added the SA Reserve Bank’s announcement to the market suggests that if the central bank does not hike interest rates, the SA currency will receive a jolt and inflation will be further increased.
Market analysts are of the view that emerging market currencies, including the SA rand, will weaken in the times to come when U.S. Federal Reserve will possibly hike interest rates in September this year for the first time in almost a decade.