SARB hikes rates to anchor inflation expectations

By hiking interest rates by 25 basis points today, the South African Reserve Bank (SARB) has demonstrated their commitment to moving real rates higher. The deterioration in the BER’s inflation expectations survey clearly concerned them, prompting the move to anchor inflation expectations within the SARB’s target range (below 6%).

Also interesting is the SARB’s concern about the outlook for the rand as we move closer to higher US interest rates. They noted that there has been a 3.5% trade-weighted depreciation in the rand since the May MPC meeting. The rand remains vulnerable to global market moves and further depreciation following the recent weakness in precious metal prices is clearly a concern.

The inflation trajectory in the coming months is key. The positive surprise in the June CPI data was broad-based. This points to weaker demand and less pricing power in the SA economy than is fully realised. If this is true, it will realise in several lower than expected inflation prints in the coming months.

In our view the SARB wants to keep the market convinced that they are committed to the hiking cycle, while actually hiking as little as possible.