SARB MPC: A pause or the top of the interest rate hiking cycle?

By Arthur Kamp, Chief Economist at Sanlam Investments

The SA Reserve Bank left its repo rate unchanged at 8.25% at the conclusion of its July 2023 Monetary Policy Committee (MPC) meeting. However, the decision was split between the MPC members, and it is unclear whether this is the top of the interest rate hiking cycle.

Reserve Bank Governor Lesetja Kganyago warned that we cannot say this is the top of the cycle yet, adding that future changes in the repo rate would be data dependent. The Bank is, therefore, leaving the door ajar should it need to hike again.

A lot will depend on the future inflation trajectory. The marked slowdown in consumer price inflation (CPI) from 7.8% in July 2022 to 5.4% in June 2023 in large part reflects base effects and lower fuel price inflation. However, it is also encouraging that core CPI edged lower to 5.0% in June 2023 from 5.2% in May 2023.

That said, progress from here is likely to be slower. Also, the Bank notes inflation risk is skewed to the upside, pointing to numerous potential sources of renewed inflation pressure, including possible adverse weather conditions, which could keep food price inflation high.

Another risk is any renewed, sustained depreciation of the rand. South Africa’s inflation outlook remains vulnerable to renewed bouts of currency weakness should global risk aversion rise, or if South Africa battles to attract foreign capital due to constrained prospects for returns on investment given a subdued growth environment. Indeed, the Reserve Bank’s forecast of a widening current account deficit to -2.9% of GDP and -3.3% of GDP in 2024 and 2025 respectively from -1.9% in 2023, implies the trend in net foreign capital inflows will need to lift appreciably from its current level to fund the deficit. This is important since in a small, open economy such as South Africa, the currency plays a significant role in the inflation process.

It is also important to take note of the Reserve Bank’s more explicit treatment of government finance in its Quarterly Projection Model (QPM). Suffice to say that should the government debt ratio continue unabated along an upward path it would complicate the Bank’s task, since too loose fiscal policy sustained for too long would be viewed as a risk for the inflation outlook. Hence, it could prompt the Bank to take a more restrictive monetary policy stance than would have been the case otherwise.

For now, though, based on the current inflation forecast, there seems to be enough reason to believe that we have seen the peak of the interest rate hiking cycle. Admittedly, the Bank’s forecast shows inflation is only expected to return to 4.5% (the Bank’s effective inflation target) by 2025. However, arguably, in the current environment of virtually no real GDP growth and soft real credit extension, it is probably better to guide inflation back towards the inflation target over a longer period than usual, as opposed to risking excessive damage to the economy by trying to reach the target quickly.

Encouragingly, too, the Bank’s QPM shows the repo rate at 8.03% at end 2023 and 7.41% at end 2024, although we should remember the QPM is only a guide for the MPC members. We should still proceed with caution from here. Even if this turns out to be the top of the interest rate hiking cycle, it is likely to be quite some time before the Bank considers cutting its policy interest rate.

Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI”), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”), Graviton Financial Partners (Pty) Ltd (“GFP”), Satrix Investments (Pty) Ltd, Amplify Investment Partners (Pty) Ltd (“Amplify”), Sanlam Africa Real Estate Advisor Pty Ltd (“SAREA”), Simeka Wealth (Pty) Ltd, Absa Asset Management (Pty) Ltd (“ABAM”) and Absa Alternative Asset Management (Pty) Ltd (“AAM”); and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (“SCI”), Satrix Managers (RF) (Pty) Ltd (“Satrix”) and Absa Fund Managers (RF) (Pty) Ltd. Sanlam is a full member of ASISA. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments/collective investment units/unit trusts may go down as well as up.

The information in this article does not constitute financial advice.  While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of, or which may be attributable, directly or indirectly, to any use of or reliance upon the information.