SARB raises interest rates to prevent a de-anchoring in inflation expectations
19 Jul, 2022

Following the announcement that the Reserve Bank has increased the repo rate by 25 basis points to 4%, the Momentum Macro Research Team from Momentum Investments has released its research note titled, SARB raises interest rates to prevent a de-anchoring in inflation expectations..

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


The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) raised interest rates to 4% at the January 2022 interest rate-setting meeting, citing higher inflation projections for the year, further upside risks to local inflation and an acceleration in global inflation (and consequently the global interest rate cycle) as the main arguments behind the 25-basis point increase. The SARB emphasised that a gradual rise in interest rates would be sufficient to keep inflation expectations bedded down.
The MPC’s interest rate decision was in line with 19 of the 23 surveyed analysts in the Reuters poll. Only four analysts forecasted no change in interest rates. In the run-up to the meeting, the forward-rate agreement (FRA) market had fully priced in an upward adjustment in interest rates.
The SARB’s growth forecast for the local economy for 2022 and 2023 remained unchanged at 1.7% and 1.8% for 2022 and 2023, respectively. The size of the forecasted negative output gap was revised to a larger 1.7% for 2022 (previously 1.3%) and is expected to narrow to negative 0.7% in 2023, from a previous forecast of negative 0.3%. The output gap is expected to shift into positive territory by 2024 (0.1% relative to a previous 0.6%). The SARB views risks to its growth projections as being evenly balanced (viewed as to the downside in the previous meeting).
The SARB nudged its headline inflation projection higher to 4.9% for 2022 (previously 4.3%) and dropped its 2023 projection to 4.5% from 4.6%. The SARB continues to view risks to the inflation trajectory as being to the upside in the near term, given the upside threat of administered prices (including electricity tariffs), higher import tariffs, stronger services inflation, higher wage demands and food and oil price risks.
The SARB communicated a shift in preferences for an interest rate hike. Four members favoured a rise in rates of 25 basis points (previously three) while one preferred to keep interest rates unchanged (previously two).
Still negative real interest rates and inflation risks skewed to the upside point to 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 FRA market, which estimated a total of 200 basis points of interest rate hikes this year and a further 100 basis points in 2023 in the run up to the meeting. The SARB’s internal quarterly projection model (QPM) predicts interest rates will end 2022 at 4.9% (relative to our own estimates of 4.75%) and 5.84% by the end of 2023 (compared with our projection of 5.75%).

Download the full report – click below…



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