Russia-Ukraine war spurs Sarb to turn hawkish

Of the five members on the panel, three voted for the quarter-point increase and the remaining two preferred a 50 basis-point hike.

More hawkish than expected

“While a hawkish statement was widely expected, this vote split makes the statement more hawkish than generally foreseen, and we suspect that financial markets will generally now become more hawkish about the interest rate trajectory,” said Elna Moolman, an economist at Standard Bank Group.

Forward-rate agreements starting in 18 months, used to speculate on borrowing costs, show traders are now pricing in 268 basis points of interest-rate hikes.

That compares with 237 basis points of increases a month ago.

Thursday’s rate hike was prompted by a deterioration in the outlook for inflation, which has more than doubled since the economy started opening up from a hard lockdown in 2020.

Russia-Ukraine conflict

The invasion of Ukraine adds to supply-chain pressures and raises the risk that price growth will breach the 6% ceiling of the central bank’s target range.

The Sarb now sees headline consumer prices peaking at 6.2% in the second quarter of this year and averaging 5.8% in 2022.

That’s well above the 4.5% midpoint point of its target range at which it prefers to anchor expectations. The inflation rate will average 4.6% in 2023 and 2024, according to central bank modeling.

Each 25 basis-point move in the key rate will have a 0.12 percentage point impact on inflation and a 0.08 percentage point effect on economic growth, said Chris Loewald, a member of the MPC.

The forecasts presented by the central bank show the result of anticipated changes in the benchmark.

The bank now sees South Africa’s economy expanding 2% this year, up from a previous forecast of 1.7%, partly due to stronger-than-expected growth in 2021 and higher commodity-export prices.

Likely criticism of the hike

While the Sarb’s latest move should help to anchor inflation expectations and bolster the attractiveness of local assets to offshore investors as the Federal Reserve and central banks in other developed markets reduce stimulus measures, it’s likely to draw criticism from some politicians and labor unions amid fears of a cost-of-living crisis.

Opposition politicians and labour groups have previously said the central bank should do more to support South Africans and the domestic economy.

“There is no virtue in higher inflation,” Kganyago said. “The higher inflation, the higher interest rates will be in future. The poor can’t protect themselves against the ravaging effects of inflation.”

The Sarb’s MPC will probably continue to lift the benchmark by 25 basis points at each of its next three meetings and further tighten at a “measured, gradual pace” in 2023 and 2024, said Razia Khan, head of research for Africa and the Middle East at Standard Chartered Bank.