Rashaad Tayob, Portfolio Manager at Foord Asset Management

With the US Fed having hiked rates 25 basis points last week, a similar move by the SARB seemed like a foregone conclusion. Over last year, the SARB has moved in lockstep with the FED, hiking 50bp when the FED hiked 50bp, increasing the pace to 75bp when the FED hiked 75bp, and then tapering down to a 25bp this year when it was clear that the FED was looking to reduce the pace of tightening.

Against expectations and market pricing for a 25bp hike, the SARB surprised the market with a 50 basis point hike as they highlighted the upside risks to inflation. It was a close call, with 3 MPC members wanting a 50bp hike and 2 MPC members wanting the anticipated 25bp.

Inflation at 7% remains above the upper bound of the 3-6% target. It is expected to remain above target until late this year and move towards the middle of the target band towards the end of next year. Food inflation is particularly problematic, and the forecast was increased from 7,3% to 9,9%.

This surprise move can be seen as an attempt by the SARB to assert its inflation fighting credentials. They have long expressed the desire to focus on the 4,5% midpoint of the inflation band rather than the upper bound of 6% and this surprise move can be seen in that light. The Governor highlighted that he considers the Neutral “Real” Repo rate is 2,5%, so the current real rate of 0,75% (7,75% repo minus 7% inflation) is not seen as particularly aggressive.

With the US currently experiencing a banking crisis, we may have seen the last of the FED rate hikes for this cycle. A slowdown in the global tightening cycle would limit the ability or need for the SARB to hike rates further. With this being potentially the last rate hike for SA in this cycle, they took the opportunity to get rates up slightly higher than expected to help fight inflation.

ENDS