SARB Leaves Rates Unchanged, but MPC Split 3 - 2

The SARB kept the repo rate unchanged at 3.5%. This was broadly in line with our, and the analysts’ consensus estimates.

The biggest surprise from yesterday’s meeting was the 3-2 vote, split between an interest rate hold and a 25 basis-point cut. We are of a view that this close vote partially represents medium-term economic growth frailties that could potentially place downward pressure on inflation expectations.
 
The procyclical nature of inflation, buoyed by tepid consumer demand levels, currently implies that inflation recovery back to midpoint is expected to remain a slow ascend. Furthermore, the reinstatement of tighter lockdown restrictions along with the possibility of additional tax increases for purposes of meeting the two-third population vaccine program by year-end, is also likely to leave inflation in a state of inertia.
 
Risks to this outlook currently emanate from falling global oil inventory levels, escalating electricity costs, and above headline food price inflation figures. The governor cited that risks to inflation are currently balanced, with the SARB forecasting inflation to average 20 basis-points ahead of our estimates at 4.0% in 2021. In the interest of servicing a widening fiscal deficit, the real repo rate ought to remain in positive territory, perhaps suggesting the inception of a moderate hiking cycle from the second half of the year.
 
This view resonates with the SARB’s Quarterly Projection Model (“QPM”), however penciling in a less severe tightening pace as suggested by this model. Pre-announcement, the 6X9 Forward Rate Agreement was pricing in a 73% probability of a 25 basis-point cut in the repo rate, but subsequently retreated to a moderate 17%, as the short-term interest rate market begins to factor in headwinds and the risks of a narrowing carry.