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SARB MPC: Repo unchanged but still hawkish
Against our forecast, the SARB MPC kept the repo rate unchanged at 8,25% due to an improvement in the macro environment, downward revisions to the inflation outlook and a stronger rand exchange rate. The tone of the statement was still hawkish, and the governor indicated that interest rates have not peaked, that it is not the end of the hiking cycle and that the trajectory of monetary policy will depend on inflation outcomes. The voting pattern also shifted materially since the last meeting, to three members voting for a hold, while two voted for a 25 bps hike, compared to May, when all members voted for a 50 bps hike. Given the backdrop of sticky inflation and upside risks thereof, we cannot rule out further rate hikes in the near term. However, our base case is that the MPC could maintain the repo rate at the current level before starting an easing cycle in mid-2024, or sooner.
SARB maintained its restrictive policy stance but stressed that this is not the end of the hiking cycle, that the economy is a very long way off from reaching the mid-point of the inflation target range and that monetary policy decisions will depend on the inflation glide path. The SARB has hiked by 475 basis points (bps) in the current hiking cycle while still seeing inflation reaching the 4,5% midpoint only in 2Q25, from 3Q24 in March. SARB continues to stress that the policy stance aims to anchor inflation expectations around 4,5% and that “at the current repurchase rate level, policy is restrictive, consistent with elevated inflation expectations and the inflation outlook. Serious upside risks to the inflation outlook remain.” This statement does suggest that the MPC is now more comfortable with the state of monetary policy. We do believe policy will likely be kept restrictive unless inflation continues to surprise to the downside and reaches the 4,5% target faster than anticipated, which could require earlier easing than our baseline forecast. Our baseline forecast is for headline CPI to average 4,9% in 2024 and 2025.
On the QPM: The MPC continues to highlight that the QPM “remains a broad policy guide”. The current repo rate remains well ahead of the interest rate path signalled by the model forecast. The updated QPM has turned much more hawkish than the previous version, adding 40 bps to its repo forecast for 2023 (to 8,03%), although the actual repo rate is above this level still. The QPM now sees the repo rate at 7,17% by the end of 2025 (previously 6,99%).
On inflation: SARB lowered its inflation forecast by 20 bps to 6,0% for 2023, and by 10 bps to 5,0% for 2024. The inflation forecast for 2025 remained unchanged at 4,5%. Food inflation was revised down to 10,3% from 10,8% previously, while there was a whole host of downward revisions to its inflation assumptions – across services, core goods, unit labour costs and core inflation. Despite these downward revisions, it still sees risk to inflation to the upside, due to electricity, food and fuel prices, wage growth, the higher operating costs of load shedding and a vulnerable rand exchange rate.
On growth: Minimal changes were made to SARB’s growth projections. SARB raised its growth forecast for 2023 to 0,4% from 0,3% in May. It maintained its forecasts for the following two years at 1,0% and 1,1%, respectively. It maintains a balanced risk assessment but warns that energy and logistical constraints remain binding on the growth outlook, limiting economic activity and raising costs. The output gap is still assessed as neutral, implying no material impact on inflation from growth.
On the repo rate: Upon just entering restrictive territory, we believe monetary policy will remain restrictive for several quarters, unless inflation surprises meaningfully to the downside. Given sticky and elevated inflation estimates, higher country risk evident in the market and a vulnerable currency, we cannot rule out a further rate hike at upcoming.