Interest rates still on hold but scales start tipping towards a hike

Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers

The SARB Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 3.5% in a unanimous decision. This outcome was in line with the consensus survey expectations, as well as the market prices. As such, there was minimal impact on bond yields, the rand, and equities.

The FRA (forward rate agreement) curve steepened slightly as the SARB’s repo rate model projected a slightly higher profile over the longer term. The model is showing a 25bp hike in the fourth quarter of this year, which implies a hike at the November MPC meeting. The FRA market is still close to viewing this as a 50/50 outcome.

The statement’s tone was quite mixed: it was not quite as hawkish as we were expecting, but hawkish enough to keep the door open should the SARB need to act soon.

The SARB revised its growth forecast up sharply for 2021 to 5.3%, which was a function of incoming data (1H21 GDP growth surprised sharply to the upside), but the Bank has turned more bearish on 2022, expecting a very modest 1.7%. This is partly due to the high base, but potentially also factors in the recent decline in commodity prices. The risks to the growth outlook are viewed as balanced.

The inflation forecast of 4.4% for 2021 is marginally higher, and in line with our expectations. However, the risk bias on inflation is to the upside, stemming from various factors. While input cost pressures remain a concern, alongside the inflation pressure that should emerge as the output gap closes, these are being offset by a resilient rand and contained unit labour cost growth.

Endogenous impetus for the SARB to hike rates imminently or to hike rates aggressively remains limited. That said, we should not rule out a November repo rate hike, as per the SARB’s model, given the MPC’s emphasis on data dependence. The November MPC meeting follows the local government elections, the Fed’s 3 November FOMC meeting where it is expected to confirm the taper, and the Medium-Term Budget Policy Statement. Hence, event risk runs high into the meeting and the MPC would want to keep its options open.

The SARB would prefer inflation expectations to remain anchored close to 4.5% and potential risks to dislodging these would prompt a hawkish policy response. We think a weaker rand would be a key factor in the start of policy normalisation. In addition, a sustained recovery would necessitate that the Bank moves away from crisis-level policy rates.