PPS Investments: MPC – 26 January 2023

The Monetary Policy Committee (MPC) decided to increase the repo rate by 25 basis points to 7.25%. Short term interest rates have now increased by 3.75% since the low of 3.5%.

The decision was split among the MPC members with three members preferring the 25 basis point increase and two members preferring a 50 basis point increase. With inflation remaining above the top end of the target band an increase in short term interest rates was largely expected by the market.

Both global and local GDP growth is expected to decline in 2023, with the forecast for global growth lower at 1.6% from the previous 1.9%. Local GDP growth is expected at 0.3% compared to the previous 0.6% forecast. The MPC estimates that loadshedding will have a 2% negative impact on GDP growth in 2023. This puts further pressure on growth in subsequent years with forecasts of 0.7% growth in 2024, (down from 1.4%) and 1.0% growth in 2025, (down from 1.5%). There is little change to the South African inflation expectation though with the forecast for 2023 unchanged at 5.4%, slightly higher in 2024 at 4.8% and unchanged in 2025 at the midpoint of the target band. Surveyed inflation expectations are however noticeably higher than the MPC’s forecast.

Although the hiking cycle has continued, the 25 basis point increase is more modest than the previous hikes. This may be viewed as an indication that the MPC is nearing the terminal rate, but the governor was adamant that no forecasting of a terminal rate was done. He re-iterated that the primary goal of the MPC was for price stability in the country and that interest rates were the best tool to achieve this objective. The MPC will not shy away from further interest rate hikes should inflation not moderate as anticipated.