MEDIA COMMENT – AHEAD OF SARB MPC MEETING AND RATE DECISION

– 26 January 2023

Jan-Daan van Wyk, Senior Analyst (Investment Management), Stonehage Fleming

With the MPC alive to the upside risks posed to their expectations for inflation in the medium term – 5.4% annual Headline CPI inflation in 2023 (4.5% in 2024) *, it’s likely that the conservative committee will once again hike rates this week. The sticking point, however, will be whether that hike is at 25 basis points, or 50.

Conscientious about delivering on its mandate of keeping inflation within the target band of 3% to 6% given to it by Government, the MPC wants to avoid the perceived error of developed market central banks in underestimating the magnitude and pervasiveness of inflation.

Commencing earlier than most developed and emerging market peers, and front-loading much of its rate hiking, the SARB MPC hiked the repurchase rate seven times since the current hiking cycle started at the end of 2021. A cumulative 350 basis points increase has the repo rate at 7% currently, which is 50 basis points higher than immediately before the pandemic related cuts started.

Views within the analyst community have been fluid and diverse since the November meeting. Some have argued that there is little need for the committee to hike past the 7% level as year-on-year inflation has been rolling over since July 2022. The current views seem to have converged on an appreciation of the MPC’s laser focus on preventing inflation expectations from becoming dislodged to the upside – both surveyed as well as that priced by markets.

At that, while a single data point such as the BER Survey of Inflation Expectations in the fourth quarter of last year does not sway the MPC, it is unlikely to take comfort in inflation expectations drifting marginally higher versus the third quarter survey (for annual inflation across the following three calendar years).

Concurrently, while annual inflation did continue to moderate in December last year – registering 7.2% year-over-year (from 7.4% in November) – it remains above the 6% upper band of the MPC’s target range for headline inflation. Uncharacteristically short-term oriented views during the Governor’s post meeting Q&A session in November – where he stated that the rate hike cycle should only end once realised annual inflation is close to the mid-point (4.5%) – further alludes to the MPC’s resolve.

This translates into money markets fully discounting a 25 basis points increase in the repo rate at the 26 January meeting, with the probability of a cumulative 50 basis points rise from here also not ruled out. The vote at the November MPC meeting was split: three in favour of a 75 basis points hike and two in favour of a 50 basis points hike. We are sure the debate at this meeting will be no less intense than at previous ones – this time between 25 and 50 basis points.

We concur with the view held by some analysts that, should the MPC hike at its upcoming meeting – arguably at a turning point in the current inflation and interest rate cycle – this increase is likely to be reversed within the next 12 months.

The MPC has a long history of credibly combatting elevated and volatile inflation. Average annual inflation in South Africa since 2005 has been 5.5%. Its work has also historically prevented longer-run inflation expectations from becoming unanchored. Monetary policy actions this past year are but another example of how serious the MPC is about delivering on its mandate.

* As of the November 2022 MPC meeting

ENDS