Economists predict another rate hike as the rand strengthens against the greenback.
Image: Graphic: Nicola Mawson | IOL
South Africans could face further interest rate hikes this year, with economists increasingly expecting the South African Reserve Bank (SARB) to raise rates again in July and potentially once more before the end of the year.
The expectations come as the rand strengthens on the back of the 25bps rate hike earlier this month and inflation risks remain elevated following higher oil prices and ongoing tensions in the Middle East.
SARB cited inflation risks linked to the prolonged conflict in the Middle East, higher fuel and food prices, and the possibility of broader price increases across the economy.
Inflation hit 4% in April as the price of fuel skyrocketed, up from 3.1% - a figure more closely aligned with the central bank’s target of 3%.
Investec chief economist Annabel Bishop said South Africa was expected to increase interest rates by 25 basis points in July, followed by a further 25 basis point increase at year-end.
Bishop noted that interest rate hikes supported the rand. She said the rand had strengthened further against the US dollar, euro and pound, trading near R16.20 and below R19.00 to euro and R22.00 to the pound.
At the same time, the rand was strengthening after Standard & Poor's affirmed the positive outlook on South Africa's credit rating.
"As S&P notes, a credit rating upgrade for South Africa is not certain, but it is seen as quite possible, and this has positively impacted financial market sentiment towards South Africa as well, adding to some of the domestic currency’s strength," Bishop said.
The rand has strengthened by 12.7% against the US dollar over the past year, while gaining 4.3% against the euro and 7.6% against the pound, Investec’s data shows.
Trading Economics noted that the central bank warned at its May meeting that additional interest rate increases could still be necessary if inflation pressures intensified. “Expectations are building that another increase could follow in July,” it said.
Wichard Cilliers, head of market risk at TreasuryONE, said geopolitical developments remained a key risk for inflation and the rand. He said concerns that tensions in the Middle East could disrupt energy supplies had pushed oil prices higher, increasing the risk of future inflationary pressures.
"Oil remains the primary market driver as traders continue to price in a growing geopolitical risk premium," Cilliers said.
Higher oil prices and a stronger US dollar are generally negative for emerging-market currencies such as the rand, although stronger commodity prices continue to provide some support, he added.
"The rand is likely to remain highly sensitive to shifts in global risk appetite and developments in energy markets," Cilliers said.
IOL BUSINESS