MPC Review – SARB Seeks Clear Evidence of Sustainable CPI Decline

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has raised the repo rate by 75 basis-points (bps) for the third consecutive meeting, from 6.25% to 7.00%. While the decision to hike interest rates was broadly anticipated, the magnitude thereof was seemingly void of consensus. Three members of the MPC voted for the increase, while two voted for a more measured 50 bps hike. 

The latest increase in interest rates has now fully reversed the 2020 cutting cycle while adding 50 bps to pre-covid policy levels. The SARB’s Quarterly Projection Model’s (QPM) forecast for the terminal repo rate is currently at 6.83%. This implies that if inflation expectations over the next 12 to 18 months do not surprise to the upside, 7.00% is therefore the tentative peak in the prevailing hiking cycle. 

Notwithstanding muted second round effects, a weaker U.S. dollar, and the capitulation of global oil prices to growing macroeconomic headwinds, the SARB continues to see upside risks to the near-term outlook in consumer prices. Headline inflation was revised up to 6.7% from 6.5% in 2022, and 5.4% from 5.3% in 2023. The 2024 and 2025 forecasts are conversely anchored at the midpoint target range of 4.5%. 

Policymakers remain resolute in their battle to contain inflation, unrelenting on a move closer towards their respective targets before victory can be declared in the battle to rein in price growth. On the other hand, our developed market counterparts (against whom we have lead in terms of rate hikes) have recently noted their consideration of the cumulative impact of interest rate hikes and the lags at which they affect the economy. According to the International Monetary Fund (IMF), one-third of the world economy will likely contract this year, as industrial activity appears increasingly fragile in absorbing aggressive monetary tightening. Our view is that in the absence of costs associated with trade wars and supply-side rigidities, a moderating macroeconomic backdrop is unlikely to maintain elevated inflationary pressures. 

Forward guidance from the FOMC, SARB and FRA market also imply a reduced pace of interest rate hikes, largely informed by falling price expectations over the short-to-medium term. 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.