The neutral real interest rate is a useful concept for assessing the stance of monetary policy. Market expectations for the neutral rate for SA have been rising since the pandemic. The chart compares a longer-term neutral estimate (a term premium-adjusted 5y5y forward expectation) against a more medium-term neutral concept based on market-implied 5y1y forward expectations. The decline in the estimated neutral rate until 2021 is consistent with the well-documented downward drift in global equilibrium interest rates. However, the decline in our estimated measures is much lower than has been documented in major advanced economies, reflecting persistently higher inflation and credit risk premia, among other factors.
Codera’s model suggests that the long-term nominal neutral interest rate embedded in the sovereign yield curve in South Africa is currently around 7.5%. This is higher than the SARB’s own estimate (which is around 7% according to the September 2022 MPC forecasts). The SARB’s estimates suggests around 75 basis points of further tightening is required to shift to a neutral policy stance over their projection period (i.e. to return interest rates to a level consistent with inflation at the inflation target over the medium term). Our model suggests that the market expects a greater degree of tightening would be required than assumed by the SARB, and this is also in line with current market expectations inferred from forward rate agreements.