High interest rates expected in South Africa

South Africa’s central bank will continue tightening monetary policy aggressively amid a deteriorating inflation outlook, currency weakness and pressure to keep pace with an increasingly hawkish US Fed.

After breaching the ceiling of the Reserve Bank’s 3 to 6% target range for the first time in more than five years, reaching 6.5% in May, inflation is set to accelerate to levels last seen during the global financial crisis that sent the rand into a tailspin.

While the Monetary Policy Committee (MPC) prefers to anchor inflation expectations close to 4.5%, heightened risks to economic growth - including flood damage in the province that’s the second-biggest contributor to gross domestic product and deeper, more frequent rolling blackouts - will also influence decision-making.

Different data points that support cases for dovish and hawkish stances mean "there’ll likely be a diversity of views on the MPC and therefore there’s room for surprises," said Peter Worthington, a senior economist at Absa Bank. It may also mark the fifth straight meeting with split votes among the five-member panel.

Of 20 economists in a Bloomberg survey, 13 including Worthington predict a second consecutive half-point increase, with the rest expecting a bigger 75 basis-point hike. Investors have fully priced in a half-percentage point move, but see a chance of a bigger increase. -Fin24