Credit Agricole expects the South African Reserve Bank (SARB) to implement two 25-basis-point increases to its policy rate - one in May and a second in July - which would bring the rate to 7.25%, according to a note authored by Sebastien Barbe, head of emerging-markets research at the bank.
Barbe's briefing highlights a balance between accelerating inflationary pressure and strengthening domestic activity. He points to higher energy costs as a key driver of rising inflation, while noting that improved economic growth should make the economy more resilient to tighter monetary conditions.
The bank signals concern about the consequences of inaction. With market pricing already reflecting interest-rate increases, Credit Agricole warns that withholding hikes poses a risk of disappointing investors - an outcome that could weigh on the rand, the note states.
Under the new inflation-targeting regime in South Africa, Barbe writes that the central bank's credibility is particularly important. He emphasizes that sustained high oil prices - which the note links to the Iran war - would amplify the need for a credible monetary stance by the SARB, given the potential for elevated inflation and greater risk aversion.
Political developments are also identified as a factor with macroeconomic implications. The note says that impeachment proceedings against President Cyril Ramaphosa could erode the prevailing macroeconomic narrative, which in turn may give the SARB additional reason to raise rates.
Analysis and implications
Credit Agricole's view combines inflationary drivers and market expectations with caution about credibility and politics. The bank's recommended course - two modest hikes - reflects an attempt to balance rising price pressures against the economy's improving resilience.
Given the elements highlighted in the note, areas of markets likely to be sensitive include the currency, fixed-income instruments and energy-linked sectors. The bank's emphasis on credibility under the new targeting framework underscores the policy trade-offs facing the SARB.
Summary of the note's key takeaways:
- Forecast: Two 25bp SARB hikes in May and July to reach a 7.25% policy rate.
- Drivers: Inflation is accelerating due to higher energy prices while growth is improving.
- Market reaction: Failure to hike could disappoint markets and weaken the rand.