Signs of inflation persistence drive an unexpected 75 bps hike
Momentum Macro Research Team – Highlights by Sanisha Packirisamy, Economist at Momentum Investments and Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments.
Full document available for download below…
Highlights
Rising recession fears prompted by more aggressive global central bank actions have caused investors to pile into the United States (US) dollar as they continue to seek out safe-haven assets in the face of worsening economic conditions. Subsequently, emerging market (EM) currencies, including the South African (SA) rand, have depreciated sharply.
Continued hawkish global central bank rhetoric and a surge in local inflation expectations have pressed the SA Reserve Bank (SARB) Monetary Policy Committee (MPC) to raise interest rates by a larger-than-expected 75 basis points to 5.5%.
The MPC’s interest rate decision was in line with 4 out of the 23 surveyed analysts in the monthly Reuters Econometer poll for July 2022, while 23 analysts (including ourselves) had anticipated a smaller rate hike of 50 basis points. The hawkish shift in the market’s interest rate views relative to a month ago came on the back of a significant uptick in inflation projections. The market’s expected peak in headline inflation for the third quarter of the year jumped to 7.5% from 6.2% after the publication of the May inflation reading.
Accordingly, the SARB raised its headline inflation projections for 2022 and 2023 from 5.9% to 6.5% and from 5% to 5.7%, respectively. Despite the upward revision in inflation projections, the SARB continues to view risks to the inflation trajectory as being to the upside, given the threat of sustained higher oil prices and a spill over into food prices. The SARB views the assumption of below-inflation wage settlements for the public sector and proposed electricity tariffs as additional upside threats to the inflation trajectory.
A higher-than-expected growth outcome for the first quarter of the year, which partly offsets the negative growth effect of an increased incidence of loadshedding, motivated the SARB’s higher growth forecast of 2% for the local economy for 2022. Expected growth for 2023 and 2024 was revised significantly lower to 1.3% and 1.5%, from 1.9% previously. Despite this sizeable downward revision to medium-term growth forecasts, the SARB still views risks to its growth projections as being to the downside.
The SARB revealed that while at the May 2022 rate-setting meeting, four members were in favour of the 50-basis point increase at the time, this time around 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.
The SARB is likely to maintain a hawkish tone as it responds to rising local inflation, persistent upside risks to the inflation trajectory, a more rapid pace of interest rate normalisation, globally, and a marked deterioration in longer-dated inflation expectations. As such, we have revised our interest rate view and now expect the SARB to follow with a 75-basis point hike at the September meeting and a 50-basis point hike at the November meeting. Additional interest rate hikes will be dependent on whether the peak in inflation is indeed reached by September/October as current market forecasts suggest.
Download the full report, click below..
ENDS
