Balance of risks table as per MPC statement

Dovish Hawkish
  1. Global growth outlook has deteriorated. As such, the SARB downwardly revised its 2022 and 2023 growth forecasts to 3.0% (3.3% previously) and 2.0% (2.5% previously).
  2. Asset values in major markets have declined sharply, and investor appetite for riskier assets has weakened further.
  3. Easing of global oil prices has contributed to a less aggressive rise in fuel price inflation for this year, at 33.7%, down from 38.8% previously. Fuel price inflation is expected to moderate in 2023, averaging 1.7%.
  4. The 2023 inflation forecast was revised lower to 5.3% (down from 5.7%), as a result of lower food, fuel and core inflation forecasts for next year. Headline inflation of 4.6% is expected in 2024 (down from 4.7%).
  5. QPM – 2022, 2023 and 2024 Repo Rate forecasts revised lower to 5.60% (5.61% previously), 6.36% (6.45% previously), and 6.76% (6.78% previously).
  1. Although inflation forecasts were either unchanged or lowered, risks were noted as still being skewed to the upside.
  2. Average surveyed expectations of future inflation have increased to 6.5% for 2022 and 5.9% for 2023.
  3. Expected electricity price increase still high, while oil price assumption remains very elevated.
  4. SARB expects that the financial market environment will remain volatile.
  5. Policymakers are still focused on acting now in order to prevent the need for large adjustments later on.
  6. The SARB also notes that policy normalisation across the globe has accelerated, especially for major markets.
  7. Local growth forecasts for 2023 and 2024 were revised slightly higher, with the output gap expected to turn positive in Q2 next year.



Implications for SA markets



Before the SARB meeting, FRAs were being paid higher further along the curve as the market reacted to the more aggressive US Fed. However, following the SARB announcement of a 75bps rate hike, some receiver bias emerged at the front end of the FRA curve. Meanwhile, the longer end of the curve pared back their hawkish bets as the SARB revised lower their inflation forecasts and QPM implied rate path. With inflation expected to pull back in 2023 and 2024 to within the SARB inflation target range as the high base effects and impact of tighter monetary conditions take hold, we maintain that longer-dated FRAs are attractive to receivers at current levels.



The swap market’s reaction to the slightly more hawkish policy stance was relatively subdued, with a moderate payer bias remaining prevalent along the curve from the start of the session until after the decision. This is mainly due to the repo rate exceeding the QPM model forecasted policy rate for the year. It underscores the market is getting to grips with SA’s monetary environment and aren’t expecting SARB to respond to inflation and ZAR weakness as erratic as some of its EM peers have. However, swap rates are trading at their highest levels since 2015. The 2v10 swap spread, meanwhile, is trading around 142bps, near the lowest its been since Q4 of 2019 as growth concerns are keeping longer-dated rates compressed. Even with the curve relatively flat at the moment, it remains attractive receiving at current rates as the SARB’s frontloading of rate hikes is expected to end soon.



Leading into the SARB policy announcement, SAGB yields declined as the market positioned for relatively less hawkish policy guidance alongside an expected 75bp rate hike. However, as the market digested the MPC’s 2:3 vote split, yields began to rise with all of the initial declines pared shortly after the policy announcement concluded. Other than the hawkish vote split, the policy update provided little in the way of surprises, with investors again trading at the mercy of US Treasury market dynamics into the end of the local session. Looking ahead, the focus will likely begin to shift to the MTBPS in October, with SA’s fiscal risks expected to attract more attention in the weeks ahead.



Heading into today’s central bank policy announcement, the USD-ZAR weakened below its previous close as traders expected a hawkish SARB. Following the announcement, which came amidst a pullback in the greenback, the ZAR initially was on the back foot as investors read the SARB as less hawkish than expected, given their downward revision of inflation forecasts for the next two years. However, the ZAR recovered and is back on the front foot against the USD. While the bold rate hike will bolster SA’s carry appeal and will help to prevent a material sell-off, the local currency still faces a number of near-term headwinds, including ongoing power outages, falling commodity prices and a strong dollar. Once these pass, however, the undervaluation and carry appeal of the local currency suggest that it could be set for a significant recovery over the medium-term period.


Bottom Line

In line with expectations, the SARB increased the Repo Rate by 75bps to 6.25%. Three members of the committee were in favour of the 75bp hike, while the other two members preferred a bolder 100bps increase. The voting pattern suggests that the SARB is likely to remain aggressive in terms of interest rate hikes at the next meeting. This indicates that the SARB is committed to preventing the ZAR from blowing out while also reining in inflation expectations.



  • When looking at the 5-yr breakeven rate, inflation expectations have risen sharply in recent months, reflecting the increased external price pressures and weakness in the rand. Note that the 5yr breakeven rate currently sits at around 6.9%, which is well above the SARB’s 3%-6% inflation target. The fact that inflation expectations remain unanchored will continue to concern policymakers.
  • In addition to anchoring inflation expectations, the SARB clearly wants to maintain SA’s interest rate differential with the US. Maintaining a sizeable interest rate differential with the US will provide much-needed support for the ZAR. Until domestic inflation and inflation expectations are brought under control, the SARB will likely continue to move in lockstep with the Fed.
  • On the macroeconomic front, the SARB lowered its growth expectations for this year, from 2.0% to 1.9% due to the floods in KZN and the intensification of load-shedding. However, the economy is expected to expand by 1.4% in 2023 and by 1.7% in 2024, both of these forecasts are above the previous projections.
  • The risks to the inflation outlook are still tilted to the upside, with the SARB’s core inflation projection remaining unchanged at 4.3% in 2022 and expectations for 2023 being slightly lower at 5.4% compared to the previous expectation of 5.6%. ETM’s Inflation Risk Index showed that while headline inflation is elevated, risks of a blowout in inflation are muted, with the index dipping back below 0.


  • The bank’s quarterly projection model expects headline inflation to remain above the target range for the remainder of this year. However, by the fourth quarter of 2024 headline inflation is expected to revert to the mid-point of the target range, on the back of declining fuel and food inflation.


Going forward

The hawkish rhetoric in the policy statement suggests that we could see another outsized rate hike in November. However, this will depend on how the ZAR performs in coming months. External developments will also be key. Oil in particular, could cause some two-way risk as markets position for the November MPC meeting.


  • ETM’s proprietary models suggest that the risks are skewed in favour of a marked recovery in the ZAR in the months ahead. While much of this will depend on the performance of the USD, it is worth noting that the USD is significantly overvalued on a PPP basis, while the ZAR is notably undervalued. Mean reversion theory suggests that the USD-ZAR is in store for a significant correction when market conditions normalise.
  • ETM’s ZSI model, which tracks the professional market’s positioning on the ZAR, is the most bullish since 2020. With the exception of the dislocation in 2020, the ZSI has been a reliable leading indicator for the ZAR.
  • ETM’s base case is for a meaningful correction lower in the USD-ZAR in the months ahead, accompanied by lower oil prices. The combination should help ease consumer price pressures in the first half of 2023.
  • While the SARB is expected to deliver another sizeable rate hike in November and possibly continue hiking rates in Q1 2023, against the backdrop of expectations for a moderation in inflation next year and mounting global growth risks, we expect the SARB to conclude its tightening cycle within the first half of next year with the Repo Rate expected to peak at 6.75%-7.00%.