Economists forecast faster front loading Sarb rate hikes

South Africa is in the midst of a rapid shift in its monetary policy outlook as economists forecast faster and potentially steeper interest rate hikes by the South African Reserve Bank (SARB). The country recently experienced a five-year high in headline inflation, sparking concerns about the economic impact of rising prices. Jeff Schultz, Senior Economist at BNP Paribas South Africa, highlighted the factors driving this new perspective on monetary policy in a recent interview with CNBC Africa. Schultz pointed out that inflation is projected to exceed 7% in the coming months, far above the SARB's target range of up to 6% and significantly higher than the 4.5% midpoint target. With global central banks, such as the US Federal Reserve, tightening monetary policy, and the South African economy showing stronger growth than expected in the first quarter, the pressure on the SARB to act decisively has increased. Schultz believes that these circumstances will likely lead to 75 basis point interest rate hikes at both the July and September Monetary Policy Committee (MPC) meetings. However, Schultz also acknowledged the possibility of a more aggressive 100 basis point hike if inflationary pressures persist and start to spread beyond food and fuel prices to core inflation. He emphasized the significant impact of second-round inflation effects, noting that a growing percentage of items in the inflation basket are experiencing price increases, indicating broader inflationary trends. The conversation also delved into the expected peak inflation rate, with Schultz predicting a peak of around 7.8% by the end of the third quarter of this year. He highlighted ongoing global supply chain challenges and geopolitical uncertainties as factors likely to sustain inflationary pressures. Looking ahead to 2023, Schultz anticipates a moderation in inflation to around 5.7%, prompting the need for proactive measures by the central bank. Regarding interest rates, Schultz outlined a forecast for a terminal policy rate of 7% by January next year, significantly higher than the current rate of 4.75%. He emphasized the need for the SARB to address rising inflation expectations in the medium term, considering the potential impact on the economy and consumer spending. On the currency front, Schultz expressed a relatively optimistic view, projecting the South African rand to remain supported by commodity prices but noted heightened risks related to global economic conditions. While maintaining a medium-term fair value target of around 1550, he cautioned that the rand could face volatility if recessionary concerns in developed markets resurface. In terms of economic growth, Schultz revised GDP forecasts to show an expected 2.4% growth rate for 2022, with a potential slowdown to 1.1% in 2023. He highlighted the interconnectedness of global monetary policy decisions and their impact on domestic growth prospects, underscoring the delicate balance between inflation control and economic expansion. As central banks navigate the complex challenges posed by rising inflation and economic uncertainty, the SARB faces a crucial juncture in its policy response. Striking the right balance between taming inflation and supporting economic growth will be key to navigating the evolving landscape of South Africa's economy.