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PPS Investments: MPC Commentary

19 May 2022 Reza Hendrickse, Portfolio Manager at PPS Investments

The Monetary Policy Committee (MPC) increased the repo rate by 50 basis points to 4.75%, following on from its prior three 25 basis point hikes since embarking on the current hiking cycle. Four MPC members voted in favour, with one preferring a 25 basis point increase.

The South African Reserve Bank (SARB) once again lowered their forecast for global growth, to 3.5% from 3.7% in March with the war in Ukraine and the continued spread of Omicron still weighing on economic activity. It also revised lower its expectation for domestic economic growth this year, from 1.7% to 2.0%, citing the impact of the KZN floods as well as ongoing electricity supply constraints. The risks to the medium-term growth outlook continues to be viewed as balanced, while inflation on the other hand has been trending higher. Both G7 and domestic inflation has been revised higher to 6.3% and 5.9% respectively, and headline inflation is expected to breach the top end of the inflation target band during the second quarter.

This month’s rate hike was widely expected, given the upward pressure on inflation, as well as given the actions of other global central banks. At PPS, we still maintain a high allocation to domestic bonds, even as short-term rates have been increasing. The steep yield curve has meant that the yield available in the long end of the curve has offset any upward interest rate pressure which meant bonds have continued to deliver an above inflation return. We remain constructive on the asset class and maintain a large component of the bond holding in inflation-linked bonds. At the same time, cash rates are becoming more attractive, so we have been increasing cash holdings.

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