Have we reached the peak of the interest rate cycle?

by Madeleen van Schalkwyk | April 5, 2023

The South African Reserve Bank’s (SARB) decision to hike interest rates by 50 basis points (bps) brings the repo rate to a 15-year high of 7.75%. Subsequently, the prime lending rate has increased to 11.25%, the highest it has been since the global financial crisis (GFC) in 2008. Since the SARB’s decision, the South African rand subsequently continued to ease to 17.70, 19.20, and 21.85 per USD, EUR and GBP respectively. Inflation has declined slightly from its peak of 7.8% in July 2022. However, inflation remains sticky as it has not slowed as quickly or as significantly as expected since the hiking cycle neared its peak. Despite this slight decrease in the overall inflation rate, core inflation has been steadily rising. This coupled with the recent banking crises in the US and Europe, which ignited fears of another systemic financial crisis, swayed the SARB’s hand in making the decision to hike rates more than what was expected.

Conventional wisdom amongst economists is that during times of high inflation central banks will hike interest rates until something breaks. This usually comes in the form of an economic downturn and subsequent recession. In March 2023, the US suffered one of its largest banking failures in history in the presence of the collapse of Silicon Valley Bank (SVB) and Signature Bank. A week later the second largest bank in Switzerland, Credit Suisse, collapsed after years of mismanagement and scandals. In order to protect the European economy, the Swiss National Bank (SNB) brokered a deal with UBS, the largest bank in Switzerland, to take over Credit Suisse for USD 2 billion.

Does this recent banking crisis mean that central banks have finally “broken” something which would indicate the peak of the hiking cycle? The team at BCA Research has noted that while it is too early to expect that central banks will begin rate cuts, we may have reached the peak in interest rates as pressures for monetary tightening begin to ease as illustrated by the BCA Proprietary Indicator tending away from 1 and towards 0. This can be seen in Figure 1 below.


figure 1

risk of recession

Additionally, the Federal Reserve hiked rates by 25-bps in their March meeting, indicating a slowdown in the pace of rate hikes and the tightening cycle nearing its peak. The Reserve Bank of Australia decided not to hike their interest rate at their April meeting, which shows further indications of a peak in the global hiking cycle.

However, a peak in the cycle does not mean that rate cuts are in sight anytime soon. As noted in Figure 2, sticky inflation remains the top concern for most central banks, even within developed economies, with inflation in Australia, New Zealand, and Canada not dropping as swiftly as was first anticipated.


figure 2

risk of recession

This picture looks similar in Europe after inflation reached a dismal high of 10.6% in October 2022, significantly above that of the Eurozone’s peers, inflation has dropped faster than many other developed economies reaching 6.9% in March. While the European Central Bank (ECB) did hike rates by 50 bps in their March meeting, it is likely that the end of the monetary tightening cycle is near.

As the end of the hiking cycle draws near, the risk of recessions increases. The SARB has revised their forecasts for the South African economy and now expects growth of only 0.2% in 2023. During the SARB meeting on 30 March 2023, SARB Governor Lesetja Kganyago remarked that increased load-shedding has added further pressure onto the SA economy, with various economists noting that South Africa may have already slipped into a technical recession, given the high likelihood of two consecutive quarters of negative GDP growth as a result.

According to BCA Research, the likelihood of a recession in the US within the next 12 months is currently at 67%. It is expected that a recession in Europe will lag the US, however, the chances that Europe will be able to avoid a recession with the US are very slim.

Therefore, investors and South African rand holders can expect further market volatility as traders pay close attention to expectations of tighter monetary policy coming from the US Federal Reserve, European Central Bank, Bank of England, and the South African Reserve Bank in the months to come.


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