On Thursday (18 November) the South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) raised the repo rate by 0.25% to 3.75% – in line with market expectations. By raising rates, South Africa (SA) has joined a number of emerging markets (EMs), including Brazil, Russia, Mexico, and Poland, in tightening monetary policy this year. However, we note that SA stands out as having only hiked the interest rate by 0.25% as compared to more significant hikes in other EM countries (e.g., a 3% hike in Brazil, while Mexico and Russia hiked rates by c. 0.75% this year).
SARB Governor Lesetja Kganyago painted a bleak picture of SA’s economic outlook with electricity shortages, worsening terms of trade and domestic investment that is likely to remain low as a result of the July unrest and the electricity situation in the country. Still, the SARB was reasonable in its assessment that the economy will grow by a mere 1.7% next year and maybe by 1.8% in 2023. The risk remains that these numbers prove to be too optimistic in the face of the growth headwinds which the country is facing.
This contrasts with inflation, that is expected to be at around 4.5% for 2022 and 2023 – the midpoint of SA’s target inflation band (of between 3% and 6%). The risks are, however, growing that inflation surprises to the upside locally as it has in much of the world. We note that administered prices (basically Eskom tariff demands), petrol prices, increasing wage demands and a weaker rand are all creating risks that so-called experienced inflation will be higher than the forecasts from the SARB. In the face of this, the MPC decided to hike rates and it seems to us that the MPC is taking the view of rather one rate hike now than needing multiple rate hikes in future. It also appears that the SARB is thinking along the lines of one hike per quarter for 2022 and possibly beyond. This is dependent on how both inflation and the SA economy perform over the coming months.
Our view is that the softer local economy will slow inflation next year and we expect a further three rate hikes in 2022. We also anticipate that this will be slightly bond positive and supportive of the rand. This single hike will have a negligible impact on consumer demand, although this is a clear communication that more rate hikes will come in 2022.
Following the rate hike, the bond market was unchanged, with the yield curve only slightly flatter. However, the rand has come under some pressure, but this is perhaps in reaction to the expectation of a current account deficit of 0.6% in 2022 – SA’s first in c. 3 years.