SARB Accelerates Tightening Pace With 50bp Hike
Despite the unchanged nature of April CPI inflation at 5.9% y/y, the South African Reserve Bank (SARB) decided to pre-empt a further acceleration of inflation expectations and the pass-through to inflation of rand weakening by raising rates by 50bps as expected. We think another 50bp hike is likely in July.
There have been limited adjustments to SARB forecasts, beyond the 2022 growth downward revision from 2% to 1.7% due to the KwaZulu Natal floods and a small upside revision to 2022 inflation to 5.9%. Yet the scale of the hike is justified by many factors: high international oil prices, which cause upside risks to local food prices (even with the SARB assumption raised to 6.6% from 6.1% average for 2022), the 4.8% fall in the rand since the last meeting which raises fears of higher import inflation, higher inflation expectations, a string of above inflation wage demands in the public and private sector, and the Fed's accelerated hiking cycle. The SARB's own estimate of local supply chain difficulties has also spiked to a record high. Of these forces, we think that 2022 inflation expectations increasing to 5.1% from 4.8% and raising structural inflation was the critical factor. Furthermore, for an economy like South Africa's, which is extremely dependent on capital inflows, the Fed's recent acceleration of the hiking pace holds serious consequences. While inflation has not yet breached the 6% inflation target ceiling, the SARB is facing a major intensification of upside risks to inflation, including rand weakness, high oil and food prices. Hence the idea is to frontload the hikes to nip inflation expectations in the bud with a limited growth trade-off at this stage, hence we expect another 50bp hike in July, with rates ending the year at 5.25% and going all the way to 6.25% by end-2023.