Raising rates by 50-basis points to take the SA repo rate to 4.75%, the South African Reserve Bank (SARB) delivered what may have been a ‘credibility move’. Thalia Petousis discusses.
When US Federal Reserve chair Jerome Powell raised interest rates this month, he began his speech by saying, “I’d like to take this opportunity to speak directly to the American people” – reflecting an understanding of the pain felt by the working consumer as global food prices rise. In a similar vein, Governor Lesetja Kganyago spoke fervently at SA’s Monetary Policy Committee (MPC) meeting about living true to the SARB’s mandate and protecting the incomes of the South African working class.
The SARB now expects local food inflation at 6.6% this year, raising its average CPI forecast to 5.9% in 2022 and 5% in 2023. Against this backdrop, some in the market have questioned how a local rate hike is going to assist when food and fuel inflation is being driven by global supply chain factors and offshore demand imbalances. Kganyago is quick to point out that the rand has depreciated above R16/US$ due to the start of interest rate normalisation in the US, leading to tighter financing conditions. There are risks to the exchange rates of countries that do not follow the path of higher rates, which has become apparent as the euro and British pound have fallen by more than 10% against the US dollar in the last year as they fail to deliver on much-needed rate hikes.
In my mind, the SARB delivered a ‘credibility hike’ to maintain market-wide confidence that it will act to protect the value of the rand. Kganyago is well aware of both the knock-on impact to rand-imported inflation and the need to encourage foreigner participation in our local rates markets. Looking at the SARB’s quarterly projection model (QPM) and the expected trajectory of the repo rate, one cannot help but notice that it is still far more sanguine than the market’s expectation for interest rates. Where the SARB’s QPM sees us ending the year at a repo rate of ~5.25% (or another 50-basis points of hikes in 2022), the market is pricing for a more aggressive move to 6%. In reality, the trajectory of food and fuel prices and the aggressiveness of the US hiking cycle may be the biggest swing factor in terms of where we land.