SARB MPC: Closing in on the top of the interest rate hiking cycle

In delivering another interest rate hike of 25bps, despite a sizeable decrease in its real GDP growth forecast for 2023 from 1.1% to 0.3%, the Reserve Bank made it clear its primary function is to keep inflation in line with its inflation target.

In the end, the Bank’s decision was driven by high, sticky inflation expectations and an upward revision to its headline consumer price forecast for next year to 4.8% from 4.5%. Inflation is only expected to return to the mid-point of the inflation target range by the final quarter of 2024. In addition, the Bank remains concerned that risk to the inflation outlook is to the upside.

The expected damage from extended electricity loadshedding is also visible in the Bank’s medium-term growth forecast. Real GDP is forecast to increase by just 0.7% in 2024 and 1.0% in 2025 – far below the required level to deliver a meaningful, sustained decrease in the unemployment rate.

However, South Africa’s paltry economic growth rate cannot be attributed to monetary policy. Rather, the lack of sufficient, reliable energy supply, infrastructure bottlenecks and a high government debt level, which crowds out private sector investment, are the main problems.

The question now is: where to from here for the repo rate? The Bank has frontloaded its interest rate hikes in this cycle. Also, at 7.25% the repo rate is above the level of 7.08% projected by the Bank’s Quarterly Projection Model (QPM) for year-end 2023. It is never easy to pinpoint the likely terminal interest rate during a hiking cycle. As the Bank notes, future interest rate decisions will be data dependent. However, if we are confident in the projections for inflation and growth, there is an argument to be made that we are very close. Perhaps one more 25bp interest rate hike, before, at the least, a pause.