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PPS Investments: MPC – 21 September 2023

21 September 2023 Luigi Marinus, Portfolio Manager at PPS Investments

The Monetary Policy Committee (MPC) decided to leave the repo rate unchanged at 8.25%. Three of the committee members preferred no change, while two members preferred a 25-basis point increase.

This insight highlights the hawkish nature of the committee even as inflation remains within the target band. Food inflation remains a particular concern as the forecast for 2023 increased from 10.4% to 10.3% leaving consumers, particularly those in poorer LSM’s in a more difficult situation.

Even though the forecast for GDP growth improved to 0.7% from 0.4% for 2023, it remained unchanged at 1.0% for 2024 and 1.1% for 2025, still disappointingly low for an emerging market economy. Inflation forecasts remain sticky at 5.9% for 2023 although slightly down from 6.0% and at 5.1% in 2024, only returning to the midpoint of the target band in 2025. The MPC also highlighted that risks to inflation are to the upside, similar to major economies, which have not started reducing interest rates yet.

The recent decline in inflation to within the target band has not yet been coupled with a reduction in interest rates as many South Africans would be hoping for as inflationary concerns still persist in the economy. In the PPS portfolios, we, therefore, maintain a cautious approach with an overweight in cash, benefitting from the increase in yields, a neutral exposure to South African bonds where the high yields compensate for fiscal concerns, and a slight underweight to total equities where risks are weighed against relatively cheap valuations in the SA market.

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