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SA Reserve Bank could hike repo rate, as IMF sounds US inflation warning

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The South African Reserve Bank could be forced to continue hiking interest rates for the second time in a row, as elevated inflation further pushes ongoing monetary policy normalisation in the world’s largest economy, the US.

File picture: Bongani Shilubane/African News Agency (ANA)

THE SOUTH African Reserve Bank (SARB) could be forced to continue hiking interest rates for the second time in a row, as elevated inflation further pushes ongoing monetary policy normalisation in the world’s largest economy, the US.

The International Monetary Fund (IMF) on Monday warned emerging economies to prepare for US interest rate hikes as the new Omicron variant has raised additional concerns of supply side pressures on inflation.

The US inflation rate from December is expected to come in at seven percent, a four-decade high, and the markets are already betting on the US Federal Reserve (Fed) raising rates earlier on the back of this, strong unemployment data, and a strong economy.

In December, the Fed announced it would accelerate the pace of tapering and buy itself the option to start hiking rates in the second quarter on persistently high US inflation.

Economists agree that possible headwinds for global economic recovery will come from the US economy, which is seeing runaway inflation for longer than expected.

In a note, IMF senior economists said the impact of the US Fed tightening its monetary policy could be more severe for vulnerable countries.

“Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally,” said the IMF.

“These developments could come with a slowing of US demand and trade and might lead to capital outflows and currency depreciation in emerging markets.”

The IMF said that while dollar borrowing costs remained low for many countries, concerns about domestic inflation and stable foreign funding led several emerging markets last year, including Brazil, Russia, and South Africa to start raising interest rates.

The SARB increased the repurchase rate by 25 basis points to 3.75 percent per year in November for the first time since March 2020, as the risks to the short-term inflation outlook were assessed to the upside.

DG Capital Forex managing director Ryan Booysen praised the SARB’s monetary policy stance as “nothing short of brilliant” that had been a solid anchor in the domestic economy over the past few years.

“While the 25 basis points hike of November 2021 won’t have a massive effect on containing inflation, the expectation is that a 25 basis points hike at every meeting in 2022 is probable and should bode well for the rand in the face of US tapering and ultimately rate hikes,” Booysen said.

“With the warning of another rates hike already having been sounded, this confirms that monetary policy should be rand supportive in 2022.”

The rand, however, remained subdued at R15.68 to the dollar by 4pm on Monday, driven by a myriad of factors and is expected to remain at risk of market volatility and weakness.

Investec chief economist Annabel Bishop said the rand was likely to trade in the R15 to R16 to the greenback this month, but much would depend on the likely speed of US interest rate increases.

“Increased certainty on the US monetary policy front has been positive for the rand, as is the upwards interest rate trajectory expected for SA,” Bishop said.

“However, the risk for SA is for higher, not lower interest rates which is also rand positive. The domestic currency has consequently been gaining from a number of factors, including the removal of most lockdown restrictions as Omicron proves mild.”

Economist at the Bureau for Economic Research Nicolaas van der Wath, however, said the rand’s performance might simply be a correction after it was probably unduly oversold late last year amid concerns about the Omicron variant in South Africa.

“Despite the resilience in early 2022, an environment of higher US interest rates does not bode well for the rand outlook, especially not if the domestic current account surplus declines and eventually moves back into deficit,” he said.

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