SARB Expected to Raise Rates 75 bps to 6.25% as Inflation Fight Intensifies

South Africa's central bank is poised to raise its benchmark interest rate by three-quarters of a percentage point next week, pushing the cost of borrowing to 6.25 percent as policymakers intensify their fight against inflation that has climbed well above their comfort zone. A Reuters poll of twenty economists, conducted between September 7 and 14, found that twelve of them expect the South African Reserve Bank to deliver exactly that move on September 22—a repeat of the increase the bank imposed in July. The remaining eight economists predicted a smaller half-point rise, but the consensus tilted decisively toward the larger move.

The central bank has already lifted its main lending rate by two hundred basis points since this tightening cycle began, a substantial escalation aimed at cooling price pressures that have proven stubborn. South African inflation is forecast to average 6.7 percent this year, well above the Reserve Bank's stated target range of three to six percent. Even as forecasters expect inflation to moderate to 5.4 percent next year and 4.6 percent in 2024, the current overshoot has left policymakers with little room to pause. Jeffrey Schultz, an economist at BNP Paribas, said the bank should maintain aggressive rate increases, noting that evidence of broad-based price pressures would likely prompt another hawkish policy statement from the monetary authority.

Looking ahead, the consensus view holds that the Reserve Bank will add another quarter-point increase in November, followed by a similar move either in January or March of next year, bringing the rate to 6.75 percent before the bank pauses for the remainder of 2023. Some economists, including Schultz, believe the peak could climb even higher—to 7 percent by January—if underlying inflation proves more stubborn than current forecasts suggest. The risk, he argued, tilts toward higher rather than lower rates if core price pressures persist.

The global backdrop adds urgency to South Africa's predicament. The U.S. Federal Reserve is expected to deliver its own three-quarter-point increase next week and is likely to keep rates elevated for an extended period once it reaches its peak, a dynamic that puts significant pressure on emerging market currencies and capital flows. South Africa's rand has already lost ten percent of its value this year, a depreciation that makes imports more expensive and can feed into domestic inflation. Economists surveyed by Reuters expect the currency to recover most of those losses over the coming year, trading around 16.30 per dollar, but the path remains uncertain.

Some economists see glimmers of relief on the horizon. Fuel prices in South Africa fell sharply in September, with petrol dropping more than ten percent, a decline that should ease both current inflation and inflation expectations going forward. Elna Moolman at Standard Bank suggested that July may have marked the peak of the consumer inflation cycle, with modest moderation likely in the months ahead. Producer price inflation, which averaged 14.6 percent this year, is expected to slow to eight percent next year and 4.9 percent in 2024, though forecasters acknowledged wide uncertainty given the volatile global environment.

Yet headwinds remain formidable. South Africa's economy is barely growing, with output expected to expand just 1.9 percent this year and only 1.5 percent next year. The economy actually contracted 0.7 percent in the last quarter. Chronic power shortages continue to hamper job creation and economic dynamism, leaving the central bank with limited room to cut rates even if inflation does moderate as hoped. The country is also expected to swing from a current account surplus of roughly one percent of GDP this year into a deficit of similar magnitude next year, a shift that could put additional pressure on the rand and complicate the Reserve Bank's task of managing both inflation and currency stability.