SARB addresses inflation concerns by hiking by another 75bps
Herman van Papendorp, Head of Investment Research & Asset Allocation and Sanisha Packirisamy, Economist at Momentum Investments
Momentum Investments have released their report based on ‘SARB addresses inflation concerns by hiking by another 75bps’ prepared by the Momentum Macro Research Team.
Highlights are shown below as well as a downloadable copy of the full report:
Lower-than-expected inflation numbers for the economy of the United States (US) for October 2022 spurred views of a cooling off in the interest rate hiking cycle globally. This led to global risk appetite improving and a weaker dollar. The rand, among other emerging market currencies, has benefited from dollar weakness.
Risks to the near-term outlook for the rand remain high with another interest-rate setting meeting scheduled for the US in December, a slew of weaker economic data out of the Eurozone (bidding the dollar stronger) as well as local political risks on the horizon in the run-up to the ruling party’s elective conference. Here the party’s 80-member National Executive Committee, including its top six leaders, will be elected.
Continued interest rate normalisation at a global level and concerns over a broadening in inflation pressures have prompted the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) to raise interest rates by 75-basis points to 7%, taking interest rates to above pre-pandemic levels.
The MPC’s interest rate decision was in line with 12 of the 20 surveyed analysts in the monthly Reuters Econometer poll for November 2022, while seven analysts (including ourselves) had initially anticipated a smaller rate increment of 50 basis points. One surveyed analyst was looking for a 100-basis point rise in rates. Notably, those looking for a smaller rate change highlighted the high risk of a bigger rate increment following the October inflation release which pointed to a further broadening of inflation pressures. The range of interest rate expectations by the end of next year remains wide in light of greater uncertainty and a wide range on expected economic outcomes.
The SARB raised its headline inflation projections for 2022 and 2023 from 6.5% and 5.3% to 6.7% and 5.4%, respectively. The SARB continues to flag the balance of risks to the outlook for inflation as being to the upside despite the international price of oil steadying in the past three months. The SARB notes that public sector wages and proposed electricity tariffs (energy utility Eskom has applied to the regulator for a 32% increase in financial year 2024) pose additional upside threats to the inflation trajectory.
Although the SARB lowered its growth forecast only marginally for this year from 1.9% to 1.8%, the outlook deteriorated more significantly for the next two years from 1.4% and 1.7% in 2023 and 2024, respectively, to 1.1% and 1.4%. Even after taking these revisions into account, the SARB sees risks to the growth outlook as being to the downside. The SARB attributes a 0.6% cut to growth resulting from expected loadshedding next year.
The SARB revealed that while at the September 2022 rate-setting meeting three members opted for a 75-basis point increase and two preferred a larger hike of 100 basis points, this time around three members favoured a 75-basis point increase, while two backed reasoning for a smaller hike of 50 basis points. None of the members expressed a preference for a 100-basis point increase this time.
The SARB is likely to maintain a firm tone in the near term as it acknowledges persistent upside risks to the inflation trajectory, continued interest rate normalisation globally, and longer-dated inflation expectations, which remain above the midpoint of the target band. We expect the SARB to follow with a smaller 50-basis point hike at the January meeting. Risks to a larger hike or additional hikes early next year will largely depend on the stickiness of local inflation relative to forecasts.
Download a full copy of the report in PDF – Click below
ENDS
