Bloomberg consensus forecasts show the FOMC (US), SNB (Switzerland), Norges Bank, BOE (United Kingdom) and MPC (South Africa) are expected to hike rates by 75bps.

Forecast: Investec Corporate and Institutional Banking forecasts a 75bps rate hike, in a split vote of 3-2, in line with Bloomberg consensus expectations. In the July MPC meeting, three members favoured a 75bps rate hike and two members 100bps and 50bps respectively.
 
There are three issues we are focusing on:

Changing drivers of the SARB’s inflation forecast and balance of risk assessment

In contrast to inflation outcomes surprising on the upside, preceding the July MPC meeting, inflation volatility has receded in 2Q 22 as outcomes have printed quite close to market expectations (August’s CPI inflation is published on Wednesday and we forecast a moderation from 7.9% to 7.5% and core CPI inflation unchanged at 4.6%).

ICIB expects the SARB’s July headline CPI inflation forecast to remain mostly unchanged at 6.5% in 2022 (ICIB 6.7%) and 5.7% in 2023 (ICIB 5.5%). Headline CPI inflation is expected to have peaked in July at 7.9%, although core CPI inflation at 4.6% could continue to rise to around 5.5% in 2Q 23, driven by higher input costs from diesel prices, wage increases and rand depreciation, likely to continue squeezing margins.

• Lower oil price: The expected moderation in headline CPI inflation can mostly be ascribed to a decline in the oil price, declining from an average of $101/bbl in July and August to $92/bbl in September. Consumers benefit the most, with a reduction in the petrol price of R2.04c/l in September, followed by a possible R1.00/l in October. The diesel price, however, was cut by only 56/cl, owing to stronger global demand for diesel, with a hike of at least 40c/l expected in October.

• Weaker ZAR: The starting point for the ZAR has weakened meaningfully from the July MPC’s meeting of R16.10/$ to approximately R17.10/$ (currently trading at R17.75/$). Whereas the rand traded relatively stable against cross currencies, there has recently been broad-based weakness (except against the GBP), with the trade weighted index of the ZAR depreciating by nearly 4% from early July. While the key drivers have been external factors such as a strong USD and global risk off sentiment, SA specific factors have amplified the weakness

• Food inflation elevated for longer: Food price inflation remains elevated and the SARB’s forecast of an average of 7.4% in 2022 could be revised higher (ICIB forecast: 8.6%). Whereas a decline in the price of palm oil could lead to lower fats and oils’ price inflation in the coming months, our food analyst, Anthony Geard, notes that grain and protein prices remain elevated. The recent rise in global corn prices, up by 10% since early July, was driven by the heat wave in the northern hemisphere and ZAR weakness, which have pushed the price of white maize 10% higher to R4 742/t since early July.

• The BER’s CPI inflation survey, published on September 22, will be an imported input into the MPC decisions and a driver in the SARB’s QPM model. 

• The balance of risks to the inflation outlook will probably remain to the upside.

Interest rate differentials and the rand

The unprecedented, coordinated action by central banks to normalise monetary policy and tighten financial conditions to combat inflation renders it all the more difficult for the MPC to enact smaller rate hikes, even as headline CPI inflation has peaked. Interest rate differentials are expected to carry more weight in the SARB’s interest rate decision to announce an expected 75bps rate hike at this week’s interest rate meeting.

There are two important dynamics featuring in the discussion:

• The surplus on the current account is expected to be smaller than the 2022 2.0% of GDP forecast after a surprise deficit of 1.3% of GDP was recorded in 2Q 22; and

• A higher G3 policy rate following a repricing of the Fed’s terminal rate to between 4.5% and 5.0% (the current policy rate is 2.5%) following a worse than expected outcome of August’s core CPI inflation rate of 6.3% from 5.9%, and larger rate hikes from the BoE and ECB. The acceleration in US core CPI inflation in August has cemented expectations of a 75bp rate hike at the FOMC meeting, with a risk of 100bp, scheduled on Wednesday 21 September. The focus will be on whether the Fed could start to moderate the size of rate hikes at the November and December FOMC meetings after delivering two rate hikes of 75bps at each of the two previous meetings.

 
The pass-through effect from a weaker ZAR to retail prices becomes all the more important as monetary policy mainly affects the demand side of the economy.

The SARB’s view on the increase in unit labour costs, and how it views the stance of monetary policy after Thursday’s rate hike, will be influential in shaping rate hike expectations going forward. MPC members have deemed monetary policy to be accommodative, as companies have been able to pass on higher input costs.  

Dynamics shaping rate hike expectations and where is the terminal rate 

 The pricing of the FRA curve remains biased towards large rate hikes over the next three MPC meetings, total 205bps (September +75bps, November +75bps and January +50bps). However, the driving force is essentially an aggressive Fed that could raise the Fed funds target rate by 200bps to 4.05% over the next three meetings.
 
The faster rate hiking trajectory by the MPC indicates that the SARB could reach its neutral policy rate, estimated by the QPM at an average rate of 6.75% in 2024, by end 2022, on the assumption of a total of 100bps rate hikes (+75bps and 25bps rate hikes at the next two MPC meetings).

This suggests a positive inflation adjusted policy rate, based on the SARB’s July headline CPI inflation from 2Q 23 onwards (2Q 23: 5.9%, 3Q 23: 5.2% and 4Q 23: 5.0%). In this respect, the balance of risks to the inflation forecast, the outcome of inflation relative to the SARB’s forecast and the MPC’s conviction in base effects, leading to a moderation in headline CPI inflation in 2023, will be important factors feeding into the terminal rate and a ‘hold’ in the policy rate during 2023, even as G3 central banks continue to hike rates in 2023.