South Africans are in for a difficult 2023, according to economists

The South African Reserve Bank is expected to raise interest rates this week, making it the seventh hike since the current cycle began in November 2021.

Maarten Ackerman, chief economist at Citadel, believes the SARB’s Monetary Policy Committee will ‘gift’ the country another 75 basis point hike, raising the repo rate to 7.00%.

Ackerman believes the SARB will continue to raise interest rates to reflect what is happening in the rest of the world, particularly the actions of the US Federal Reserve (Fed) in the current environment.

“Although South Africa’s inflation is not as high as the United States (US), we are nearing peak inflation,” He went on to say that the impact on the South African economy is unfortunate.

“The demand side is already weak, and our consumers are under pressure for various reasons like high-interest rates, high unemployment, high debt levels, and the increasing cost of living.”

Worryingly, the economist noted that rate hikes typically take months to impact the real economy, with data typically showing up six to nine months later.

This paints a bleak picture for consumers by mid-2023, he claims.

“Since the SARB is almost a mirror image of the Fed, which is likely to keep hiking into next year before slowing down, as they get more confident that inflation is slowing, one can assume that as South African inflation drops below the upper target early in 2023, the SARB will also start to slow the speed of hiking rates.”

According to Ackerman, things may begin to stabilise to the target range of less than 6% in the first half of 2023, allowing the SARB to begin slowing or even halting the pace of hikes for a while.

According to Jeff Schultz, senior economist at BNP Paribas South Africa, it is still too early to call the Reserve Bank’s hiking strategy a “pivot.”

“We expect a cautious tone, with the central bank unlikely to commit to any imminent ‘pivot’ until it is confident its 4.5% target midpoint is achievable in its forecast horizon,” he said.

According to Schultz, the SARB is not out of the woods when it comes to bringing inflation back to its 4.5% target midpoint. He estimates that headline CPI will struggle to return to the upper 6% target range before late Q2 2023 and will only approach it by the end of 2024.

“While there is an argument for a shift down in the pace of SARB hikes to allow for monetary transmission and to acknowledge a souring domestic growth outlook, we believe that the SARB is likely to view that it has merely done the minimum up to this point by only recently fully unwinding the 275bp in cumulative cuts it delivered in response to the Covid pandemic,” he said.

Growth is an obvious concern, with GDP estimates for 2022 and 2023 revised lower, but the Reserve Bank is more concerned about persistently high inflation.

BNP Paribas and Nedbank economists expect inflation to have eased slightly in October, to 7.4%, but this is likely to be overshadowed by stronger momentum in core inflation, according to Schultz.

“The SARB will also be sensitive to the fact that its own two-year inflation outlook looks to be at least 50bp higher than the two years preceding the pandemic…Therefore, we expect the central bank to be steadfast in its view that it still has more work to do to ensure that CPI and inflation expectations continue to shift lower.”

With the US Fed’s hike cycle far from over and a global economic recession on the horizon for 2023, economists predict that South Africans will face turbulence in the new year, with rand volatility and at least another 50 basis point rate hike.

“For now, we expect the SARB to remain firmly in risk management mode, intent on building buffers for an ever-uncertain global and domestic economic outlook,” Schultz said.