The spotlight is on the SARB this week as it delivers its final rate verdict for 2022. The big question is whether the SARB delivers another outsized 75bps hike or scales back on the pace of tightening and hikes rates by a smaller 50bps. While strong arguments can be made for both a 75bps and a 50bps hike, our base case is for the latter. That said, we do see a considerable risk of a larger 75bps hike.
While the modest upside surprise in the October CPI reading has prompted a shift higher in rate hike bets in the professional rates market, traders are still positioned for a 50bps hike tomorrow. Economists surveyed by Bloomberg meanwhile favour another 75bps hike. Out of the 20 economists surveyed, 15 expect a 75bps rate hike tomorrow, while 4 are betting on a 50bps hike and 1 is expecting a 100bps hike. This is reflected in the accompanying chart.
Key reasons for tilting the scale in favour of a smaller rate hike
- Global and domestic growth outlooks have worsened – Eskom woes amplifying SA’s slowdown
- Rand appreciation – ZAR has gained more than 2% against the USD since the September SARB meeting. More gains are likely
- Oil prices have fallen – Brent crude price in ZAR is down more than 5% since the September SARB meeting
- Inflation expectations have moderated – SA’s 5yr breakeven has fallen from around 7% to 5%
- US monetary policy pivot – Prospects of less aggressive tightening in the US are rising
- Global food prices have plunged – UN FAO World Food Price Index is down almost 15% from its peak in March
Inflation is above target but expected to decelerate in the months ahead
While inflation remains above the upper limit of the 3% to 6% inflation target, the high base effect of this year will start to take effect from the end of Q1 2023. Much of the inflation this year has been a function of high energy and food prices due to the supply shocks from the Russia-Ukraine war that broke out in February. Therefore, with commodity prices correcting lower and the base effects to set take effect from February/March next year against the backdrop of slowing growth, we expect headline inflation to fall back within the SARB’s inflation target in the first half of next year.
There is significant two-way risk heading into tomorrow’s SARB MPC meeting with economists and traders divided on the magnitude of the SARB’s rate hike. The SARB’s policy trajectory is inextricably linked to those of the Fed and other major central banks and given recent intimations that the end of the global rate hike cycle is drawing nearer, the SARB may well consider moving to smaller increments slightly ahead of the curve to avoid incurring unnecessary damage to the South African economy. We, therefore, foresee a vote split 3-2 in favour of the 50bp hike, with such an outcome likely to be used as a guide in monetary policy going forward and also offers the SARB room to manoeuvre in case inflation expectations rise again.