Interest rates hiked to prevent second-round inflation effects
18 Jul, 2022

Following the announcement that the Reserve Bank has decided to increase the repo rate by 25 basis points, the Momentum Investments team has released its insights titled, Interest rates hiked to prevent second-round inflation effects, prepared by the Momentum Macro Research Team.

Please see below, a summary of highlights from the team, as well as a downloadable PDF of the research paper.


A significant upward revision to this year’s inflation projections, higher global inflation pressures and the consequent acceleration in the global interest rate cycle drove the South African Reserve Bank (SARB) Monetary Policy Committee’s (MPC) decision to raise interest rates by 25 basis points to 4.25%.
The MPC’s interest rate decision was in line with 15 of the 19 surveyed analysts in the Reuters poll. Only four analysts forecasted no change in interest rates, while no analysts anticipated a larger move of 50 basis points. Although the Reuters median consensus estimate on expected headline inflation for 2022 has ratcheted 0.7% higher since the start of the year, the median expectation for interest rates by the end of 2022 has remained unchanged at 4.75% and the expected rate by the end of 2024 has dropped from 5.75% to 5.5%.
The SARB revealed that while three members favoured a rise in rates of 25 basis points, two members considered raising interest rates by 50 basis points. While the SARB had previously emphasised that a gradual rise in interest rates would be sufficient to keep inflation expectations bedded down, this was not mentioned again and instead, the SARB reiterated the importance of ensuring price stability to prevent a deterioration in citizens’ standards of living.
*The SARB’s growth forecasts for the local economy for 2022 and 2023 were revised higher to 2% (previously
1.7%) and 1.9% (from 1.8%), respectively. The size of the forecasted negative output gap was revised to a smaller 1.3% for 2022 (previously 1.7%) and is expected to narrow to negative 0.3% in 2023, from a previous forecast of negative 0.7%. The output gap is expected to shift into positive territory by 2024 (0.5% relative to a previous 0.1%). The SARB still views risks to its growth projections as being balanced given the potential positive effects of higher commodity export prices.
The SARB upped its headline inflation projection to 5.8% for 2022 (previously 4.9%) and raised its 2023 assumption marginally to 4.6% from 4.5%. The SARB continues to view risks to the inflation trajectory as being to the upside in the near term, given the upside threat of sustained higher oil prices and a spillover into food prices.
Still negative real interest rates and mounting upside risks to the inflation trajectory signal additional interest rate increases this year and next. Given the likely accelerated global interest rate path, local interest rate hikes are expected to be front loaded to keep SA inflation expectations anchored. We expect a more gradual pace of normalisation than the forward-rate agreement (FRA) market and closer in line to the SARB’s internal quarterly projection model (QPM), which predicts interest rates will end this year at 5.1% (relative to our own upwardly revised estimate of 5%) and 6.1% by the end of 2023 (compared with our unchanged projection of 5.75%).
Following the MPC meeting, the FRA market factored in more than 200 basis points in interest rate hikes by the end of the year and a further 75 basis points by the end of next year.



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