SARB leaves repo rate unchanged at 8.25%

On the 20th of July, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 8.25%. The decision to pause was not unanimous and came in 25 basis-points (bps) below surveyed expectations. Three members of the MPC voted for the flat policy stance, while two members voted for a 25-bps increase. 

The SARB’s assessment of economic activity moderately improved since the last MPC meeting. GDP growth is now forecast to expand by 0.4% in 2023, versus 0.3% at the last MPC meeting. Positive real spending by firms, households, and the public sector reinforced the more positive economic outlook. Moreover, better than expected terms of trade were cited as being beneficial to both GDP and the revised exchange rate assumptions.

While transport inflation appears largely contained, above inflation wage increases, ongoing financing needs of the state, and the stronger El-Nino (drought) conditions continue to present notable tailwinds to the SARB’s CPI outlook. On the other hand, better monthly CPI outcomes have led to downward revisions in both core and the headline CPI forecast. 

The SARB now expects core and headline inflation to average 5.2% and 6.0%, respectively in 2023, before retreating towards mid-point in the second half of 2025. 

Contrary to the SARB, we consider risks to inflation being more on the downside. Subdued aggregate demand levels as well as a depreciating U.S. dollar currently underpin this view. Furthermore, the absence of costs associated with trade wars and supply-side rigidities (i.e., Covid lockdown restrictions) also imply that elevated inflationary pressures are less likely to be maintained by a moderating macroeconomic backdrop. 

Our base case is for the economy of South Africa to expand 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.

Considering the above, the Forward Rate Agreement (FRA) market is now discounting the risks of further rate hikes, while simultaneously pricing-in interest rate cuts only in the second quarter of 2024. Despite the growing likelihood of a flat policy regime, cash continues to remain attractive in both real and risk-adjusted terms.

Following yesterday’s policy announcement, the 3-month, and the 12-month JIBAR rates remained broadly unchanged at 8.5% and 9.4%, respectively, versus the previous month. These elevated JIBAR rates mean that money market funds are expected to generate a return of between 9% and 10% over the next 12 months with no (or limited) risk of capital loss. 

Fund Comment

Our cash and income funds maintain a bias towards floating rate instruments, thereby immunising our portfolios against interest rate fluctuations. This further ensures a consistent level of outperformance relative to benchmark over various measurement periods. Where applicable, we sought to enhance yield through either extracting the liquidity, term, or credit risk premium, while simultaneously funding issuers at wholesale lending rates. 

This article was written withTaquanta Asset Managers – Nedgroup Investments Best of Breed Partner.