MPC Rate Hike

Yesterday, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) raised the repo rate by 25 basis-points (bps) from 3.75% to 4.00%. This outcome was broadly in line with our, and the analysts’ consensus estimates. Four members of the MPC voted for the increase, while one voted for an unchanged rate. 

Upward revisions of the SARB’s 2022 inflation forecast amid high global inflation and lofty oil prices, remains key for rising interest rates. Furthermore, a much faster pace of US liquidity tapering, and Fed policy tightening is likely to result in elevated repo rate expectations. 

To this end, the Forward Rate Agreement (FRA) market continues to price in a 150-bps increase in the repo rate over the prevailing calendar year. On the other hand, the amended implied policy path of the SARB’s Quarterly Projection Model (QPM) is of a marginally dovish yet similar view, despite rising economic challenges. 

According to the International Monetary Fund’s (IMF) latest economic forecasts, global and domestic growth now appears increasingly fragile in absorbing aggressive monetary tightening. Furthermore, dissipating fiscal support and easing supply-side disruptions are envisaged to reduce cost-push tailwinds from 2022 Q2. 

We therefore anticipate a more gradual hiking cycle (up 75 - 100bps for 2022) in the interest of sustainable economic recovery and the absence of formidable demand-pull inflation. Risks to this outlook currently stem from increasing geopolitical tension among oil producing nations, electricity tariffs rising well-above headline inflation, and the possibility of persistent local currency weakness. Our current projection is for the current cycle to peak at 5.5% by the end of 2023. 

We will observe the dynamics of these and other unforeseen risks and adjust our views accordingly if required. Once more, our cash and income funds remain well positioned for the current hiking cycle, as we only hold floating rate instruments which will all reset their interest rate coupons to the new higher rate within the next few weeks and months. 

Taquanta Asset Managers