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 delivers surprise 50-basis point hike on sharply higher inflation forecasts’ prepared by the Momentum Macro Research Team. In this article is a summary of highlights from the team, as well as a downloadable PDF of the research paper.
- Banks are better capitalised today than in the run up to 2008, which reduces the chances of a fallout akin to the global financial crisis (GFC). However, in response to current stresses, banks have become more conservative in their lending practices. This tightening in lending standards could act as an additional brake on economic growth and as such this has had implications for monetary policy.
- In light of rising financial stability risks, central bankers in the developed world have become more cautious about raising interest rates, at least until developments in the banking sector have become clearer.
- Since the January 2023 South African Reserve Bank (SARB) Monetary Policy Committee (MPC) meeting, the SA rand has had the fourth worst currency performance against the United States (US) dollar, following the Russian rouble, the South Korean won and the Thai baht.
- However, aside from a weaker currency, the SARB noted additional upside risks to the inflation trajectory stemming from administered tariffs (including electricity) and stickier local food prices. Despite the international price of oil steadying since November 2022, the SARB continues to flag energy inflation as an upside threat to local price pressures given no reprieve in the war in Ukraine and the expected rebound in Chinese growth.
- The SARB raised its headline inflation assumption of 5.4% for 2023 to 6% and lifted its view on outcomes for 2024 from 4.8% to 4.9%, relative to the Reuters consensus of 5.8% and 4.7% for this year and next. This compares to our projections of 5.8% and 4.6%, for 2023 and 2024, respectively. The SARB calculates that loadshedding adds 0.5% to headline inflation pressures.
- Despite an already downbeat forecast for growth in January, the SARB lowered its projection even further to 0.2% for 2023. Growth is now expected to recover slightly to 1% in 2024 (from an estimated 0.7% in January 2023). This is lower than the Reuters consensus forecast of 0.4% in 2023 and 1.5% in 2024 and our downwardly revised projections of 0.3% and 1.3%, respectively.
- Following on from these revisions, the SARB sees risks to the growth outlook as being fairly balanced. The SARB maintained its assumption that power outages will erase around 2% from expected growth this year.
- The MPC’s interest rate decision to hike by 50 basis points to 7.75% came as a surprise to financial markets. A majority of 18 from 20 surveyed analysts (including ourselves) expected interest rates to increase by 25 basis points in the monthly Reuters Econometer poll for March 2023, while two analysts were expecting an unchanged interest rate stance.
- The SARB revealed that while at the January 2023 rate-setting meeting two members favoured a 50-basis point increase and three presented an argument for a smaller hike of 25 basis points, this time around three members opted for a 50-basis point increase and two preferred a smaller hike of 25 basis points. None of the members expressed a preference for no move in interest rates.
- Should disinflation continue in upcoming quarters to sustainably revert to the midpoint of the target by the fourth quarter of next year, this is likely to be the end of the interest rate hiking cycle. However, if the SARB sees inflation risks as having intensified, we could well see another 25-basis point hike in May. Beyond this, we would see further hikes as being less effective in bringing down inflation and more harmful to growth, given the positive real interest rate trajectory, particularly using the forward-looking view on inflation.
- In our view, interest rate cuts are likely some way off given persistent upside risks to the inflation trajectory, continued interest rate normalisation, globally (albeit we are likely nearing peak levels), and longer-dated local inflation expectations which remain a 1% higher than the midpoint of the 3% to 6% target.
Download the report ‘SARB delivers surprise 50-basis point hike on sharply higher inflation forecasts’ – click the image below: