Record real interest rate sets the stage for an aggressive rate hike tomorrow

  • South African inflation has hit a 13-year high, meaning the real interest rate (the repo rate after inflation) is at its lowest level since 1998.
  • That could mean a 75 basis point hike in the repo rate on Thursday, which would be the biggest since 2002.
  • Investors are pricing in an 80% chance of a 75 basis point move and a 200 basis point move in total by the end of the year.
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South Africa’s real interest rate is at its lowest in nearly a quarter century, bolstering the case for aggressive monetary policy tightening by the central bank on Thursday.

The gap between annual inflation and the country’s key interest rate widened to 2.65 percentage points in June as consumer price growth breached the ceiling of the central bank’s target for a second consecutive month and accelerated to a 13-year high.

READ | Inflation jumps to 7.4% – the highest in 13 years

The gap is the widest since 1998, when the benchmark redemption rate was introduced, and further erodes the differential that makes local assets attractive to foreign investors.

Even ahead of Wednesday’s inflation data, traders were fully pricing in a second consecutive half-point rate hike this week.

Forward rate agreements, used to speculate on borrowing costs, show investors also forecast an 80% chance of a move of 75 basis points and 200 basis points in total by the end of the year. Of 20 economists in a Bloomberg survey, 13 predict the monetary policy committee will raise the key rate by half a point this week, with the rest expecting a larger increase.

A three-quarters percentage point hike to 5.5% would be the biggest since September 2002, when the South African Reserve Bank raised the benchmark repurchase rate by 100 basis points.

‘Even faster’

A weak rand likely to fuel imported inflation and expectations of a 75 basis point rate hike by the US Federal Reserve this month “could increase pressure on the South African Reserve Bank to it tightens even faster,” said research leader Razia Khan. for Africa and the Middle East at Standard Chartered Bank. His base case is for a half-point raise this week.

The rate of price growth in June was fueled by high food and gasoline prices, even as the government temporarily reduced a fuel tax to contain increases in the retail price of gasoline and gasoline. wholesale diesel prices. The measure probably delayed the peak of inflation.

The MPC prefers to anchor inflation expectations near the 4.5% midpoint of its target range. It has already raised the policy rate by a cumulative 125 basis points since November and announced even higher borrowing costs ahead.

Heightened risks to economic growth – including flood damage in the province which is the second largest contributor to gross domestic product and deeper and more frequent blackouts – slowing economies of major trading partners and Fears of a global recession will also influence decision-making.

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