However, whereas the FOMC’s hawkishness was linked to an upward revision in the dot plot interest rate forecast and squashing market expectations of rate cuts as early as H2 23, the MPC’s hawkishness cannot be ascribed to a deterioration in the inflation outlook.

Indeed, while the headline and core CPI inflation forecasts were left unchanged at 6.5% and 4.3% in 2022, the forecast for 2023 was revised to 5.3% (P: 5.7%) and 5.4% (P: 5.6%). 

Moreover, the BER’s inflation expectation survey for 3Q 22 presented mixed results. Near term and 2023 inflation expectations, sensitive to current inflation outcomes, accelerated to 6.5% (P: 6.0%) and 5.9% (5.6%). But medium and longer term inflation expectations remained contained, i.e. the average five-year inflation expectation rate moderated from 5.6% to 5.4% and 2024 from 5.4% to 5.3%.


Balance of risks to inflation remains to the upside 

The balance of risk assessment stood out, remaining to the upside. The MPC statement noted that “the risks to inflation identified over the past year have been realised, pushing up South Africa’s headline rate and inflation expectations”.

Because of a high level of uncertainty internationally, arising from the Russian/Ukraine war, the energy crisis in Europe, and China’s zero-tolerance Covid-19 policy, the oil price’s recent declines can be reversed abruptly.

In South Africa, the public sector wage bill (of which the SARB has penciled in the February 2022 forecast of 2.6%) remains uncertain as trade unions have rejected the government’s offer of 3.0% on the extension of the cash gratuity of nearly R20.0bn. Further, the outlook for food and fuel price inflation remains uncertain.

Over the medium term, electricity tariff increases (SARB assumption is 8.9% vs. Eskom’s application of 32.5%) and other administered price increases hold potential implications for the direction of inflation in 2H 23, when base effects could otherwise lead to a meaningful decline in inflation to below 5.0%.
Finally, the MPC noted the acceleration in the normalisation of policy rates by major central banks, with more rate hikes from the G3 central banks presenting additional risks to the rand.

The starting point of the rand in the SARB’s inflation forecast was R16.90/$, while currently trading at R17.60/$. Foreign capital flows and market volatility risk remain elevated for currencies such as the ZAR, with risks to imported and core goods inflation.    


Looking ahead

We think that predicting the SARB’s reaction function, i.e. the magnitude and pace of rate hikes, could become more difficult as the policy rate approaches the neutral rate of 6.75%, as projected by the QPM.

While FRA rates remain focused on the pace and size of Fed rate hikes, i.e. both pricing in a 75bps rate hike at the respective November interest rate meetings, approaching the neutral rate in South Africa could warrant a shift to a more gradual pace of rate hikes.

The risk of continuing with an aggressive, front-loaded path of rate hikes could lead to a more restrictive policy stance for an economy not suffering from demand-pull pressures.

In this respect, ZAR movements, the unfolding of SA specific risk factors and the underlying trend in core CPI inflation will be closely monitored. Our base case interest rate view is that the rate hiking cycle could end in November 2022 or January 2023, with a 50bps rise in total, raising the repo rate to 6.75%.


  • Disclaimer

    Focus and its related content is for informational purposes only. The opinions featured on the site are not to be considered as the opinions of Investec and do not constitute financial or other advice. The information presented is subject to completion, revision, verification and amendment.

    Although information has been obtained from sources believed to be reliable, Investec Securities Proprietary Limited (1972/008905/07) or its affiliates and/or subsidiaries (collectively “ISL”) does not warrant its completeness or accuracy. Opinions and estimates represent ISL’s view at the time of going to press and are subject to change without notice. Past performance is not indicative of future returns. The information contained herein is for information purposes only and readers should not rely on such information as advice in relation to a specific issue without taking financial, banking, investment or other professional advice. ISL and/or its employees and/or other Investec Companies may hold a position in securities or financial instruments mentioned herein. The information contained in this document alone does not constitute an offer or solicitation of investment, financial or banking services by ISL. ISL accepts no liability for any loss or damage of whatsoever nature including, but not limited to, loss of profits, goodwill or any type of financial or other pecuniary or direct or indirect or consequential loss howsoever arising whether in negligence or for breach of contract or other duty as a result of use of the reliance on information contained in this document, whether authorised or not. This document may not be reproduced in whole or in part or copies circulated without the prior written consent of ISL.

    Full Investec Bank Limited disclaimer    

    ICIB disclaimer

    The information furnished in this report, brochure, document, material, or communication (“the Communication”), has been prepared by Investec Bank Limited, acting through its Investec Corporate and Institutional Banking division (herein referred to as “Investec”). This Communication does not constitute: a research recommendation, investment, legal, tax or other advice; and is not to be relied upon in making an investment or other decision. The intended recipients should consider the information contained herein to be objective and independent of the interests of the trading and sales desk concerned. Opinions and any other content including data and market commentary in this Communication are provided for information purposes only.

    The information contained herein has been obtained, where required, from various sources believed to be reliable and may include facts relating to current events or prevailing market conditions as at the date of this Communication, which conditions may change without notification to Investec and/or the recipient.  This is a summary of relevant information and should not be considered as complete. This Communication may not be considered as “advice” as contemplated in the Financial Market Act, 19 of 2012 and/or the Financial Advisory and Intermediary Services Act, 37 of 2002 as it does not take into account your financial position or needs.

    This Communication may also not be seen as an offer to enter into or conclude any transactions.  In relation to the information Investec does not guarantee the accuracy and/or completeness thereof and accepts no liability in relation thereto. You should make your own independent evaluation of the relevance and adequacy of the information contained herein and make such other investigations as you deem necessary, including, where relevant, obtaining independent financial advice, before participating in any transaction in respect of the securities referred to in this document.

    Any opinions, forecasts or estimates herein constitute the personal judgement of the party who compiled this Communication as at the date of this document. Thus, this Communication reflects the different assumptions, views and analytical methods of the specific individual/party who prepared this Communication. As such, there can be no guarantee that future results or events will be consistent with any such opinions, forecasts or estimates. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied is made regarding future performance.

    There may be risks associated with the information, products or securities, including the risk of loss of any capital amounts invested or traded due to market fluctuations. There is no obligation of any kind on Investec or any of its Affiliates to update this Communication or any of the information, opinions, forecasts or estimates contained herein.

    This Communication is confidential for the information of the addressee only and may not be reproduced in whole or in part, nor shall it be copied, redistributed or circulated, or disclosed to another unintended party, without the prior written consent of the relevant entity within Investec. In the event that you contact any representative of Investec or any party in connection with the receipt of this Communication, you should be advised that this disclaimer applies to any subsequent oral conversation or correspondence that occurs as a result of this Communication.  Any subsequent business you choose to transact shall be subject to the relevant terms and conditions thereof. Neither Investec nor any officer or employee thereof accepts any liability whatsoever for any direct or consequential loss arising from any use of this Communication or its contents.

    Investec Corporate and Institutional Banking is a division of Investec Bank Limited registration number 1969/004763/06, an Authorised Financial Services Provider (11750), a Registered Credit Provider (NCRCP 9), an authorised Over the Counter Derivatives Provider, and a member of the JSE. Investec is committed to the Code of Banking Practice as regulated by the Ombudsman for Banking Services. Copies of the Code and the Ombudsman's details are available on request or visit Investec COBP