SARB strengthens hawkish stance amid intensifying inflation risks

Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers

The South African Reserve Bank (SARB) increased the repo rate by 25bp to 4.25%. The outcome and hawkish tone in the statement were in line with analysts’ and the market’s expectations. However, there were some surprises. The fact that two of the five Monetary Policy Committee (MPC) members voted for a 50bp increase at today’s meeting, while a pause was not discussed suggest that a 50bp hike at one of the following meetings has become a distinct possibility.

In addition, the Bank revised the 2022 GDP growth forecast upwards, despite downward revisions to its global growth assumption, as well as the fact the sharply higher food and fuel prices will be a drain on consumers’ pockets. This reflects a view that the rebound in commodity export prices will be sustained for most of the year, which also leads to a healthy current account surplus forecast of 3.0%/GDP.

The anticipated second quarter 2022 breach of the 6.0% upper limit of the inflation target is largely because of the higher oil price. While some may criticise the committee for lagging the inflation dynamics, the Russia/Ukraine crisis and subsequent oil price surge have caught most forecasters by surprise.

The more important adjust is the upward revision to the core inflation profile, which most likely reflects a combination of the smaller output gap (given the upward revision to the 2022 GDP growth projection), some price pass-through from higher fuel costs, as well as a recovery in unit labour cost growth. To be sure, the BER inflation expectation survey for first quarter 2022 showed that expectations across various metrics have risen further, albeit not yet alarming. Given the MPC’s focus on the 4.5% mid-point and objective of ensuring that inflation expectations remain anchored, further sequential tightening is almost guaranteed.

The debate is not whether the SARB will pause in the coming meetings, but rather whether there will be enough reason to hike by 50bp rather than 25bp. In this regard, we think the rand remains a key factor. Today’s hike and hawkish rhetoric supported the currency, with the rallying sharply after the meeting – USD/ZAR fell from 14.75 to 14.55. Sharp rand weakness has historically been the trigger for larger increments. This time, accelerated Fed tightening, CPI breaching 6.0%, and inflation expectations climbing further could culminate in a 50bp hike by the SARB at the May or, more likely, the July MPC meetings.

On a longer-term horizon, global growth is likely to moderate quite sharply due to the tightening in liquidity conditions brought about by the strong US dollar, Fed interest rate hikes and balance sheet reduction, and the high oil price. South Africa will not be immune to a slump in global activity and liquidity. While this is very likely to put pressure on the rand, substantially weaker growth will give the SARB pause for thought about extending the hiking cycle as aggressively as is currently priced by the market.