SARB hikes repo by 50-bps to 8.25%

On the 25th of May, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) raised the repo rate by 50 basis-points (bps) from 7.75% to 8.25%. The decision to hike was unanimous, and in line with consensus estimates. The repo rate has now increased by a cumulative 475-bps since the start of the prevailing hiking cycle. 

The SARB’s assessment of economic activity has modestly improved since the last MPC meeting. GDP growth is now forecast to expand by 0.3% in 2023, versus 0.1% at the March MPC meeting. Advances in logistics and sustained reductions in load-shedding, or increased energy supply from alternative sources, are considered fundamental to the more positive outlook. 

Furthermore, the rand’s weakness was cited as being beneficial to the trade sector, notwithstanding slower global activity, and deteriorating terms of trade. The central bank also expects household spending to remain buoyant in real terms, and in line with a positive but weak rise in real disposable income. 

While transport inflation appears seemingly contained, notable increases in food and core price inflation have now led to upward revisions in the headline print to 6.2 % in 2023, from 6.0% at the last MPC meeting. Headline inflation for 2024 is also expected to increase to 5.1% before easing to 4.5% in 2025. 

Contrary to the Reserve Bank, we see inflation risks to be more on the downside. Subdued levels of aggregate demand, reduced supply-side disruptions, falling global liquidity levels and a high base effect largely underpin our more constructive view. Even market expectations have capitulated to high base effects that are now envisaged to filter through in the second half of the year. 

Regarding our GDP outlook, we believe that the domestic economy is likely to continue operating way below its potential growth rate over the foreseeable future. Sub-investment ratings, recurring power outages, and increasing political turmoil, are expected to increase the cost of servicing debt, where companies will be forced to either cut capital spending, undergo debt stress, or reduce labour force. 

Forward guidance indicates that local monetary authorities remain resolute in maintaining the global hiking pace, despite growing economic concerns and easing CPI pressures. To date, the SARB’s aggressive stance has failed to contain the sell-off in the rand and longer-dated government bonds. Notwithstanding domestic challenges, EM flows continue to be undermined by tighter liquidity conditions and the U.S.’s debt ceiling woes. 

In the SA money market, the 3-m JIBAR rate rose 17.5 bps versus the previous month to 8.133%, while the 12-m JIBAR rate increased by 50 bps m/m to 9.875%. These elevated JIBAR rates mean that money market funds are likely to generate a return of between 9% and 10% over the next 12 months with no (or limited) risk of capital loss. Once more, our cash 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.