5 minute read
Have interest rates peaked?
It is a well-documented fact that countries across the world have been hit by multiple crises in recent years that have sent prices of goods and services soaring. These include pandemic-era supply chain bottlenecks, repercussions stemming from the conflict in Ukraine, and an escalating energy crisis.
These events resulted in central banks globally rushing to increase interest rates in an almost synchronised attempt to tame inflation. Now, nearly two years after they started the most aggressive monetary policy tightening in decades, the question on everyone’s lips right now is whether enough has been done for central banks to finally start taking their foot off the brake? There is unfortunately no simple answer to this at the moment as such decisions will very much be data dependent going forward and will likely vary from country to country.
What makes these decisions difficult is the fact that while inflation has been steadily moderating in the majority of regions globally, it continues to trend well above the target levels of most central banks. We have seen several monetary policy committees leaving rates unchanged at their respective September meetings, suggesting that their current policy stances might be restrictive enough for inflation to continue slowing over the coming months. However, none of them are brave enough to call this the definite end of the hiking cycle, as upside inflationary risks clearly remain present.
In the US, members of the Federal Open Market Committee of the Federal Reserve System opted to leave the country’s benchmark interest rate steady at a 22-year high in September, which is keeping with the bank’s strategy of moving more carefully in the latter stages of the fight against inflation. The officials, however, signalled support for another rate hike in the latter stages of this year. What concerns them is that the US economy has remained remarkably strong despite rapidly rising interest rates. The excess savings that consumers built up during the pandemic have still not been depleted, and consumption growth remains resilient and the labour market strong, which could keep inflation elevated. However, overtightening poses risks for banking, financial services and the real estate market, as consumers’ ability to repay their debt fades.
Meanwhile, in Europe, policymakers at the European Central Bank (ECB) are cautiously optimistic that inflation is on its way back to 2% even without further rate increases. The ECB raised its key interest rate to a record high of 4% in September but signalled that its 10th consecutive hike may be its last – for the time being at least – as the European economy was slowing and could even dip into recession.
Closer to home, recent commentary from the members of the South African Reserve Bank (SARB) have been particularly hawkish. The Monetary Policy Committee (MPC) left rates unchanged at a second consecutive meeting in September. It was, however, not a unanimous decision, as two of the five members voted for a 25-basis-point hike, making it another “hawkish pause”. The governor has made it clear that “the job of tackling inflation is not yet done”. Some upside risks to the inflation outlook have reasserted themselves, including a rapid rise in the oil price and a depreciation of the rand. A final 25-basis-point increase at the end of the year is therefore not completely off the table yet.
The Bank of Namibia (BoN) will likely mimic any rate decisions by the SARB in the short term. Domestic inflation has started picking up in recent months, rising from 4.5% in July to 5.4% in September, primarily on the back of fuel price increases. In August, the BoN left rates unchanged, leaving the 50-basis-point spread between Namibia and South Africa’s repo rates unchanged for the time being. Because of the currency peg to the rand, the BoN tends to place more focus on the country’s foreign reserve levels than on inflation. The governor again mentioned that the BoN has seen capital outflows of around N$10 billion during the first seven months of the year, compared to N$6 billion worth of outflows over the same period in 2022. These are the same figures he cited during the MPC announcement in June, meaning that there were no material net outflows since.
None of the high-frequency economic indicators suggest that it is necessary for the BoN to hike rates further at this point, therefore the BoN’s decision makes sense to us, especially as the non-performing loans of the commercial banks continue to slowly deteriorate and private sector credit uptake remains lacklustre.
No central bank can or will call this a definitive end to the monetary tightening cycle, as inflationary risks clearly remain to the upside. A fresh round of geopolitical instability has resulted in volatile oil prices, adding to the risks stemming from the expected El Niño weather pattern. Central banks will therefore be wary of claiming victory too early in their fight against inflation, and at present we see it as unlikely that rates will be cut before the middle of 2024.
