Balance of risks table as per MPC statement


Dovish Hawkish
  1. Due to intensifying load-shedding, economic growth is expected to weaken by 2 percentage points this year.
  2. The output gap is expected to remain around zero.
  3. Fuel inflation is expected to be -2.0% in 2023 (down from -0.6%), and electricity price forecasts were lowered.

Growth prospects in Asia and Europe remain vulnerable to the negative effects of the Russia and Ukraine war.

  1. Headline and core inflation were revised higher. The headline CPI reading is expected to rise to 6.2% (from 6.0%), and core inflation to follow to 5.3% (from 5.1%).
  2. Inflationary risks remain tilted to the upside.
  3. Global growth forecast for 2023 was revised higher to 2.4% (from 2.0%).
  4. South Africa’s GDP growth is expected to rise to 0.3% in 2023 (from 0.2%).
  5. Given inflation and load-shedding risks, further currency weakness is expected.
  6. Headline inflation is only expected to revert to the mid-point of the target range by Q3 2024.
  7. QPM implied that the Repo Rate would average 7.63% (from 7.13%) in Q4 this year.
  8. South Africa’s external financing needs are expected to rise
  9. Tighter global financial conditions raise the risk profiles of economies needing foreign capital, generally leading to weaker currencies.



Implications for SA markets


FRA While the policy statement or Governor didn’t commit to further policy tightening, the FRA market continues to price in at least another 50bps worth of rate hikes in the current cycle. There is a clear payer bias in the wake of the interest rate announcement as the ZAR blows out once again. The ZAR has reacted negatively to the policy guidance, with the market clearly looking for more hawkish guidance than was given. Against this backdrop, ETM remains of the view that the SARB will deliver another 25-50bps worth of rate hikes over the next two meetings.
IRS Swaps have been paid higher post the rate decision, with the curve bear steepening when looking at the 2v10 swap spread. The market was expecting a bigger rate hike, which did not materialise and has limited the upside for the front end of the curve, for now. In addition, a weaker ZAR and higher inflation forecasts have raised longer-term inflation expectations and thus seen long-end rates paid higher. The risk premium being priced into SA assets suggest that further steepening could be in store, but the outlook that rates will remain higher for longer and economic growth weak will limit this over the longer term.
Bonds Following an expected 50bps hike delivered by the SARB at its MPC meeting, SAGBs came under renewed selling pressure. Interestingly, the SAGB curve bear steepened in the wake of the rate decision. Shorter-dated yields were driven higher by the upward revision by the SARB to its inflation forecasts as a weakening ZAR exacerbates price pressures. Movements on the long end have been more pronounced as investors weighed in on SA’s gloomy fiscal outlook. While weak growth in a fiscally sound economy would traditionally drive longer-dated bond yields lower, the weak growth outlook has amplified fiscal fears, given the impact of weaker growth on government revenues. ZAR weakness also raises SA’s debt servicing costs. This has led to a marked sell-off in longer-dated maturities. With economic and financial conditions expected to remain fragile, bonds will likely remain under pressure in the near term.
ZAR It will go down as a day to remember for ZAR bears, with the ZAR coming under sharp selling pressure in the wake of the rate decision and Governor Kganyago’s presser. Despite pulling back from the intraday higher, where the USD-ZAR rose to a fresh high of 19.7640 in the minutes following the announcement, the pair is set to end the day more than 2.00% higher. Comments from Governor Kganyago that the ZAR could weaken further prompted speculators to ramp up their short USD-ZAR positions and is likened to taking “a red flag to a bull.” Although the recent rate hike means that SA maintains a healthy interest rate differential with the US, SA’s domestic risks have eroded much of the ZAR’s resilience. More aggressive forward guidance from the bank would have supported the underperforming ZAR or, at a minimum, capped the losses. Looking forward, the probability of the USD-ZAR testing the 20.0000 mark is assessed to be high following today’s MPC meeting.



Bottom Line


  • Consistent with expectations, the SARB increased the Repo Rate by 50bps to a 2009-high of 8.25%. Notably, the decision was unanimous, marking the first time since the bank started raising rates in November 2021 that the MPC was in total agreement. The accompanying statement suggested that the 50bp rate hike was a result of upside risks to the inflation outlook and concerns over the risk of ZAR-weakening capital outflows. It will go a long way in affirming the SARB’s commitment to reining in inflation and inflation expectations, but may not be enough to end the recent run on the ZAR.



  • The SARB’s 50bp rate hike was aimed at ensuring that South Africa can continue to attract foreign capital. Interest rates had to rise to compensate lenders for exposing their portfolios to SA’s idiosyncratic risk. If foreigners continue to decrease their capital exposure to SA as they have in recent weeks, the ZAR would come under further pressure, which would ultimately stoke inflationary pressures.


  • This is particularly relevant in the current context of tightening global financing conditions. Investors are more judicious over where they invest their capital at this stage of the global monetary cycle, and SA’s risk profile has deteriorated notably in recent weeks due to poor governance.


  • These concerns were evident in the following statements: “Tighter global financial conditions raise the risk profiles of economies needing foreign capital, leading generally to weaker currencies. Given upside inflation risks, larger domestic and external financing needs, and load-shedding, further currency weakness appears likely.”


  • Further supporting the SARB’s decision today were revisions to the inflation forecasts generated by the (soon-to-be-updated) QPM, which reflected a slower disinflationary cycle back to target. The model now expects headline inflation to average 6.2% through 2023, compared to 6.0% in March (and 5.4% back in January). The 2024 forecast, meanwhile, was revised from 4.9% to 5.1%, while the 2025 forecast remained unchanged at 4.5%. Notably, the SARB maintained that risks to the overall inflation outlook were tilted to the upside


  • The private sector has also clearly taken note of the higher inflation outlook. Both the BER inflation survey and market inflation expectations (as reflected in breakeven rates) are pointing to a stickier inflation outlook. This primarily reflects a weaker exchange rate and more-persistent-than-anticipated domestic and global inflationary pressures, with domestic demand conditions not driving much in the way of price pressures (as reflected in the chart below).



  • As for the economic outlook, the SARB raised its GDP growth forecast for 2023 from 0.2% to 0.3%. This is highly optimistic, with in-house forecasts pointing to economic contraction this year. Further out, the SARB’s economic outlook remains weak, with a 1.0% growth rate expected in 2024 and a 1.1% growth rate in 2025. This suggests that the economy will likely remain in the sub-2% lull that it was stuck in for years before the post-pandemic recovery, with structural growth issues mounting.


Going forward

  • The SARB was reluctant to overtly signal that more rate hikes lie ahead, with forward guidance instead hinting at a wait-and-see The policy statement noted that “at the current repurchase rate level, policy is restrictive, consistent with elevated inflation and risks”. This gave little indication of what the SARB views as the terminal rate for the current cycle. On the whole, the SARB is navigating extremely uncertain and fluid economic conditions, and will likely remain highly data-dependent and reactive through the months ahead.


  • The risk that the SARB is facing is that more rate hikes may trigger further capital outflows on the basis that tighter monetary policy exacerbates SA’s growth and fiscal risks. Nevertheless, the house view is that the SARB will continue to hike rates in the coming months if capital outflows persist and the ZAR continues to depreciate. Governor Kganyago’s statement that “it is far more difficult and costly to correct yourself if you have under-responded” to inflation suggests that the SARB will remain wary of doing too little and letting inflation become unanchored, with a hawkish bias thus remaining prevalent.