Hiking into Weakness

On 22 September 2022, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) raised the repo rate by 75 basis-points (bps) from 5.50% to 6.25%. This outcome was broadly in line with our, and the analysts’ consensus estimates. Three members of the MPC voted for the increase, while two voted for a more aggressive 100 bps hike. 

The SARB expects headline inflation to average 6.5% in 2022, in line with their previous forecast. Notwithstanding an estimated third quarter peak in headline inflation, monetary authorities still anticipate upside risks to the current CPI outlook. Rising nominal wages, increasing administered prices and a weaker exchange rate currently underpin this view. Furthermore, global policymakers remain resolute in their battle to contain inflation. The MPC’s policy decision followed global interest rate hikes to the collective tune of 500 bps across major central banks. More notably, the Fed delivered its third straight policy rate increase of 75 bps, signalling another rate hike before year-end. 

To this end, the Forward Rate Agreement (FRA) market is currently pricing in another 25-bps hike in the repo rate at the November 2022 meeting. For Q1 2023 the FRAs are pricing in a further 50bps hike. It is worth noting that the FRA curve is volatile immediately after rate announcements and may well adjust itself over the next week. On the other hand, the amended implied policy path of the SARB’s Quarterly Projection Model (QPM) sees the repo rate closer to current levels by year end, from 6.45% at the last MPC meeting. 

According to Bloomberg’s Global GDP Tracker, world industrial activity has now slid into negative territory, appearing increasingly fragile in absorbing aggressive monetary tightening. Falling demand levels, deteriorating trade conditions and low propensities to invest are expected to reduce cost-push tailwinds from their current lofty levels. 

On the back of a moderating macroeconomic backdrop and falling inflation expectations, Taquanta Asset Managers anticipates a more measured interest rate approach, as well as the growing likelihood of a near term peak in the current hiking cycle at 75 -100bps higher than current levels. 

Risks to this outlook currently emanate from unabating geopolitical tensions, electricity tariffs rising well-above headline, and the possibility of persistent local currency weakness. We continue to observe the dynamics of these and other unforeseen risks and will therefore adjust our views accordingly if required. 

Fund Comment
Once more, our cash and income funds remain well positioned for the current hiking cycle, as we mainly hold floating rate instruments which will all reset their interest rate coupons to the new higher rate within the next few weeks and months. This will serve as much needed relief to income investors following the deep interest rate cuts sustained at the height of the Covid-19 outbreak. 

Taquanta Asset Managers 

(Taquanta Asset Managers is the Best of Breed for the Nedgroup Investments Cash Solutions fund range)