The SARB’s Monetary Policy Committee (MPC) will decide whether to change its policy rate on Thursday next week. Market analysts expect that the SARB will hike by another 50 basis points over the course of the next two meetings (January and March). Market pricing, on the other hand, has pared back recently, with just one more 25 basis point hike currently priced in.
Having front-loaded tightening relative to what their published forecasts suggested would be needed to meet the inflation target, the MPC now has to decide when to stop tightening.
Headline inflation is still far above the mid-point target at 7.2% in December 2022, while core came out at 4.9%. Large electricity cost increases, expected production and supply chain problems from load shedding, a weak currency and climbing BER surveyed inflation expectations support a view that further tightening might be needed.
SARB remains quite optimistic about potential growth compared to some others, even though they have pared back their projections in their most recent forecast. If the MPC interprets intensifying load shedding as a series of supply shocks that will drag down potential, that would support a more dovish view around the need for rates to go up further.
It is curious that some analysts are forecasting that the SARB will begin cutting interest rates in late 2023, having only returned the policy rate to their own estimate of the nominal neutral rate in November 2022 and with real interest rates still negative (i.e. the policy rate below inflation, see chart). I assume part of the reason is that some are onboard with SARB’s latest forecasts that have Headline inflation nearing the mid-point of the target around 2023Q3. That assumes helpful base effects will dominate. And of course the MPC set the policy rate at a higher level than assumed in their November projection, so policy has already been tighter than what their forecasts assumed. Another possibility is that those analysts believe neutral is lower than what SARB does. Our estimates of the neutral rate that the bond market has been pricing in over the long term has been higher than SARB’s, so it will be interesting to see which view wins out over the coming MPC decisions.