By: Mokgatla Madisha, Head of Fixed Interest at Sanlam Investments

The South African Reserve Bank’s Monetary Policy Committee (SARB MPC) is set to make a crucial decision on monetary policy on Thursday. Given that they are nearing the end of the hiking cycle, any number of outcomes are possible at this meeting. Since the November meeting inflation has declined further from 7.4% to 7.2% and core inflation which excludes volatile items of food and energy, came out at 4.9% from 5.0%. Annual inflation remains well above the upper target band of 3-6%, but the quarter-on-quarter rate declined from 4.4% to just 3.3% in December.

We know that in setting policy the MPC is not only concerned about local factors, but they consider developments in international markets to the extent that they impact the currency and hence inflation. The signals coming from the US are going to be particularly challenging for the MPC to interpret. Is the MPC going to listen to the markets when it comes to the path of rates in the US or are they going to give more weight to what the Fed governors themselves have been saying about the likely path of rates?  The interest market in the US is signalling that there is perhaps one more hike of 25bps and that rate cuts will start from July, while the Fed governors are quite insistent that they see policy above 5%, which will require at least 50bps hikes and they expect to keep it restrictive for some time.  On Monday the European Central Bank (ECB) President, Christine Lagarde, also made it clear that “rates will still have to raise significantly and steadily until they are sufficiently restrictive, and stay at those levels for as long as necessary”.

Since the last MPC, China has removed most of its COVID-19 era restrictions. The reopening of that economy will give a significant boost to global growth, but it will also increase demand for commodities, which could result in higher prices.

We can also expect the MPC to spend a lot of time on the ongoing electricity crisis in the country and its impact on growth. A negative output gap, being the difference between current growth rate and potential growth rate, should generally lead to lower inflation as demand is generally weak. However, chronic loadshedding is impacting the supply side of the economy too. In recent days we have seen newspaper articles about how food supplies are being affected by lack of electricity.

In conclusion, we expect the MPC to raise the repo rate by 50bps to 7.5%, as a restrictive policy stance is a necessary step to bring inflation back within the target. High rates will support the currency against still rising rates in developed markets and possible greylisting by the Financial Action Task Force.