SA’s ex-ante real policy rate becomes unattractive as expectations rise

SA inflation expectations have risen recently, but falling long-run trend remains intact

SA’s BER inflation expectations survey showed a deterioration across the board in 2Q23, with average inflation expectations higher across all periods, apart from the five-year-ahead expectations, which fell 30 bps to 5,2%. Despite the recent increase, inflation expectations have maintained their long-run declining trend since 2013.

A correction in one or both of these markets is likely in the coming months

To return SA’s ex-ante real policy rate to relative attractiveness requires a lower US ex-ante real policy rate (probably by a lower OIS rate as the Fed communicates an end to its hiking cycle later this year and the market extrapolates this to price in cuts to the policy rate). Alternatively, FRA rates would need to rise to reflect a higher-for-longer approach by SARB, and inflation expectations should ease as headline inflation continues to decelerate.

Another SARB hike implies that upside for front-end bonds has compressed, in our view

SA’s bond yields moved lower for most of June, from what we would describe as a large oversold position during the second half of May (see A pessimistic reflection of current yields dated 15 May). The curve also bull steepened. However, now for the first time since early May, we would describe the front end of the nominal curve as broadly “fair”.

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