Very close call for rates this week

Since the South African Reserve Bank’s (SARB) last monetary policy committee (MPC) meeting, the risks to the inflation outlook have increased. This leaves this week’s interest rate decision very difficult to call.

At the previous meeting in March, Governor Lesetja Kganyago’s tone was exceptionally hawkish about the inflation outlook. This sent a clear message to the market that rate hikes will be coming this year. Indeed, the threats to the inflation outlook have become more pronounced in the past two months.

Notably, the oil price – which was the biggest driver for South Arica’s favourable inflation outlook – has increased since March. The weaker rand has also weighed on prices, as does the prospect of higher electricity prices, though the extent of this will only be known at the end of June when Nersa announces how much of an increase it will grant Eskom.

The SARB is very concerned about these risks, but they have made it clear that any actions will be data-dependant. The MPC is also keeping a close eye on indications from the US Fed on the timing and extent of their rate hikes. The deterioration in US data in recent months does means that rate hikes could be delayed in the US.

This meeting is a very close one to call. Given our understanding of the SARB’s decision-making process, it is possible to construct a strong argument for why the SARB will hike rates by 25 basis points at this meeting. And an equally strong argument for why they will leave rates on hold. The market doesn’t quite see it this close: economic consensus is for no change and current market pricing implies less than an even chance of a hike.