SARB projects lower inflation

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) has decided to hold the repo rate unchanged at 8.25%.

• Policy rate remained unchanged in a split decision.
• SARB projects lower inflation.
• Focus remains on current inflation, which is high relative to G20 countries.
• Balance of risk assessment back to upside risks from broadly balanced.
• Keeping an eye on the Fed and worried about currency volatility if rates stay higher for longer. 

The decision to keep the repo rate unchanged, with two members in favour of a rate cut, was indicative of a more robust discussion within the MPC about the direction of interest rates, since the last unanimous rate hike of 50bps in May 2023. However, notwithstanding a lower projected inflation trajectory, which shows the mid-point of the target can be hit as early as Q4 24, almost every constructive development had been countered by an upside risk assessment. Thus, where two of the members’ views aligned with the QPM forecast, the upside balance of risk assessment caused the preference for a delay by four of the members. 

Not yet “comfortable”

The conviction rate of the MPC in its inflation forecast appears to be low. Indeed, the new forecast is more optimistic than ICIB’s forecast in 2025. The inflation forecast has been revised to 4.3% (4.7%), 4.2% and 4.2% (4.5%) in Q4 24, Q1 25 and Q2 25, and an average of 4.9% (5.1%) and 4.4% (4.5%) in 2024 and 2025. The balance of risk assessment to the inflation forecast remains to the upside. 

The MPC remains focused on the current inflation rate for several reasons: 

• The moderation in inflation has been too slow.  

• It feeds into inflation expectations, which are backward-looking and remain above the target of 4.5% even though moderating.  

• Inflation at 5.2% is high relative to G20 countries.  

• Not yet convinced of US rate cuts: The battle against global inflation has not been won, remains above the target in many countries, and a decline in inflation rates has not always been sustained. Rates remain high in the US and may stay higher for longer. The MPC is concerned about renewed EM currency volatility if implied rate expectations, which expect three rate cuts of 25bps each by January 2025, are again too optimistic. The most recent episode of repricing interest rate expectations played out in April, when US inflation surprised to the upside after implied rates showed a total of 150bps rate cuts by end 2024, and the Fed’s June median dot plot showed only one 25bps rate cut by year end. 

• Other risks that have been flagged are global logistics constraints as shipping costs have increased, oil prices have increased, and services inflation remains sticky (June’s rental inflation prints will be important). 

QPM rate forecast

The lower inflation trajectory led to a minor decline in the QPMs endogenous repo rate forecast of 7.65% (7.64%), 7.29% (P: 7.34%) and 7.25% (7.33%) in 2024, 2025 and 2026, with the neutral real interest rate at ¬2.7%. This shows that the SARB has not adjusted the country risk premium. Even though SAGB yields have rerated on expectations of fiscal policy continuity, government debt remains elevated and fiscal risks have not abated. Further, the assumption for G3 interest rates has not changed as the MPC awaits guidance from the FOMC.  

Road map to September’s MPC meeting

Investec Corporate & Institutional Banking's baseline scenario remains for the MPC to deliver two rate cuts of 25bps each at the September and November MPC meetings, and a further 50bps in H1 25. In the context of the MPC’s balance of risk assessment, the next MPC meeting scheduled for September 19, will be preceded by the FOMC on September 18, and three SA inflation prints for June, July and August (F:4.9%). The MPC’s starting point for the R/$ exchange rate was R18.35/$ from R18.60/$ previously.