Interest rates: A slower pace but with optionality

Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers

The SA Reserve Bank (SARB) Monetary Policy Committee (MPC) opted to hike the repo rate by 25 basis points (bp) to 7.25% in the first meeting of 2023. While this was against the consensus forecast for 50bp, the forward rate agreement (FRA) market had been oscillating between 25bp and 50bp in the weeks leading up to today’s decision.

This eighth hike in the cycle takes the policy rate to slightly above neutral, which may partly explain why the committee opted for the smaller increment. Even so, the voting split was decidedly hawkish with two members favouring a larger 50bp hike.

Ongoing hawkishness is justified by the potential for tightening in global financial conditions amid significant global growth risks, the increase in surveyed inflation expectations, upside risks to food prices from load shedding and the shift from La Nina to El Nino, and the pending Fed decision where the Federal Open Market Committee (FOMC) could lift rates by as much as 50bp.

The SARB slashed its growth forecast, as well as its estimates for potential growth, due to the severity of load shedding. While the government has indicated optimism on the ability to end load shedding within the year, Eskom’s comments suggest otherwise and the SARB is clearly not factoring in much chance of improved power supply. Electricity constraints, weak global growth, lower commodity prices and depressed sentiment result in a weaker growth outlook. This, in turn, is expected to dampen inflation pressure down the line. In addition, the last round of inflation data releases was on the soft side relative to expectations. While much of the disinflation has been due to lower fuel price inflation, broader segments have shown a turn. Moreover, rentals and owner equivalent rent – which account for a substantial share of Core CPI – have lost momentum.

If inflation expectations in the BER’s Q1 survey show a marked decline, then there is a notable chance that this is the end of the hiking cycle. However, we think the numerous risks between now and the March meeting will ensure that a further 25bp hike remains on the cards. This will take the peak in the policy rate to 7.50%.

In sum, the voting distribution, tone of the statement, and significant event risk (potential grey listing, Budget, Fed FOMC) give the SARB the option to hike again in March, should it be deemed necessary.