The decision by the South African Reserve Bank to hike the repo rate by 50 basis points came as no surprise to Bank Windhoek analyst Suta Kavari and RMB South Africa analyst John Cairns who correctly predicted that the SARB would hike interest rates this week.
Motivating the Reserve Bank’s decision to hike the repo rate, its Governor Lesetja Kganyago said in a statement, “From a monetary policy perspective, a key risk to the inflation outlook is not only the possibility of further depreciation, but also the extent to which the there is a change in the pass-through dynamics, which have been relatively muted in recent years.”Motivating the Reserve Bank’s decision to hike the repo rate, its Lesetja Kganyago said in a statement, “From a monetary policy perspective, a key risk to the inflation outlook is not only the possibility of further depreciation, but also the extent to which the there is a change in the pass-through dynamics, which have been relatively muted in recent years.”
Added Kganyago, “the MPC still views the stance of monetary policy to be accommodative. Despite the rate increase, the real repurchase rate remains low given the higher expected inflation over the period. The MPC will remain focused on its core mandate of containing inflation within a flexible inflation targeting framework.”
Commenting on the expected move before the announcement was made by the Reserve Bank, Kavari said of the anticipated move, “for the South African Reserve Bank’s rate decision later today, we feel that the Bank will take a bold step. A 50 basis point hike, largely priced in, is on the cards. I am prepared to put a wager on that. The 50 basis point hike will be justified given that inflation is expected to breach the upper band of the SARB’s target range for an extended period of time and remain elevated.”
Added Kavari, “risks to the inflation outlook have significantly increased and we expect the SARB to revise upwards their inflations forecast, taking account the rand’s sharp depreciation and acceleration in food prices. The rand remains the biggest risk to the inflation outlook, having depreciated by around 15.5% to the dollar since the last MPC meeting in November.”
For his part, Cairns said, “we expect that they will revise their inflation numbers significantly upwards and this will prompt them to accompany the hike with a hawkish statement. Our expected outcome would probably lead to a steepening of the curve. A 50 basis points move, by contrast, would build confidence in the SARB, flattening the curve. Similarly, the rand would be disappointed by 25 basis points but inspired by 50 basis points. But remember the rand usually does not respond very aggressively to rate changes, and the threat of an out sized move this time around because of edginess in the market has been reduced because of the rand’s stability this week.”