Photo by: Bloomberg
Given the electricity and labour challenges facing South Africa, the Reserve Bank’s Monetary Policy Committee is likely to increase interest rates by 25 basis points this month, says multinational financial services provider Citi Bank.
The bank said another 25 basis point hike would be on the cards for September, while a further 50 basis points hike would be implemented in two increment in March and May next year.
“The trajectory from here on is climbing at quite some speed, simply because we are coming off the base effect of a very low oil price that pushed inflation down to 3.9% this year,” Citi Bank South Africa economist Gina Schoeman said on Thursday.
The group expected inflation to peak at 7.2% in February next year, which was “easy to achieve” with a base effect of 3.9%.
She noted that while it was a “scary number”, it was still single digits, which was “quite something” for the local economy.
Schoeman added that inflation would remain above 6% for the remainder of 2016, noting that it was a hawkish outlook, as the Reserve Bank’s profile in May stood at 5.9% for the second half of 2016, but added that Citi Bank’s profile averaged 6.2%.
THE GOOD NEWS
Schoeman added that, despite the depressed outlook, “at some point, the electricity will come”, which meant that the outlook for the South African economy would improve.
She forecast that the economy would grow by 2.1% next year and by 2018, “something with a three in front of it” looked likely.
“One part of South Africa that certainly sets us apart from many other emerging markets, is that even though we have these inefficiencies, that leave us with inflation often above 6%, we have institutional strength,” she added.