SARB keeps its foot firmly on the pedal and hikes rates by 75bps
Prepared by the Momentum Macro Research Team.
Momentum Investments have released their report based on ‘SARB keeps its foot firmly on the pedal and hikes rates by 75bps’ prepared by the Momentum Macro Research Team.
Please see below, a summary of highlights from the team, as well as commentary from Sanisha Packirisamy, Economist at Momentum Investments and Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments.
As the United States (US) Federal Reserve (Fed) continues to raise interest rates to extinguish the flames of inflation, capital continues to flow into the US, pushing up the price of the dollar. With investors continuing to seek out safe-haven assets in the face of rising recession risks, emerging market (EM) assets, including the South African (SA) rand have depreciated sharply.
Continued hawkish global central bank rhetoric and a surge in local longer-dated inflation expectations have forced the SA Reserve Bank (SARB) Monetary Policy Committee’s (MPC) hand to raise interest rates by another 75 basis points to 6.25% to stem risks of inflation persistence.
The MPC’s interest rate decision was in line with 12 (including ourselves) out of the 20 surveyed analysts in the monthly Reuters Econometer poll for September 2022, while eight analysts had anticipated a smaller rate increment of 50 basis points. The range of interest rate expectations by the end of the year remains wide in light of elevated uncertainty and a broad view on economic outcomes.
The SARB kept its headline inflation projections for 2022 unchanged at 6.5% but lowered next year’s forecast markedly from 5.7% to 5.3%. Despite the downward revision in inflation projections and a lower international price of oil, the SARB continues to view risks to the inflation trajectory as being to the upside. The SARB believes the assumption of below-inflation wage settlements for the public sector, global energy supply disruptions 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 for this year from 2% to 1.9%, the outlook brightened for the next two years from 1.3% and 1.5% for 2023 and 2024, respectively, to 1.4% and 1.7%. Risks to the growth outlook are viewed as balanced with consumption and fixed investment outcomes likely to offset loadshedding and slower global growth.
The SARB revealed that while at the July 2022 rate-setting meeting, one member favoured an increase of 100 basis points, three members preferred an increase of 75 basis points and only one member viewed an increase of 50 basis points as being appropriate, this time around three members opted for a 75-basis point increase and two preferred a larger hike of 100 basis points.
The SARB is likely to maintain a hawkish tone in the near term as it responds to peaking local inflation, persistent upside risks to the inflation trajectory, a more rapid pace of 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 50-basis point hike at the November meeting. The risks to an additional hike early next year cannot be ruled out given the range of preferences on the MPC. In our view, this would be determined by the timing and extent of the peak in inflation and whether or not the peak has in fact already been reach as market forecasts suggest.
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