SARB: Tightening Bias More Noticeable
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Bottom Line: SARB as widely expected kept rates unchanged at 8.25%. However, the introductory statement and Q/A session with the governor left the impression that the SARB is somewhat more worried about remaining inflation risks. An upward revision to 2024 CPI headline inflation forecast (not 2025) also hints in this direction. Even so, for now we suspect that SARB will wait and see, given that the lagged impact of the tightening cycle is still feeding through. The SARB did however hint that 2024 rate cuts would likely be smaller.
Figure 1: SARB CPI Inflation Projections (%)
Source: SARB
SARB
The SARB as widely expected kept the key policy rate unchanged at 8.25%, with the same 3 to 2 split evident in July. Key issues behind the ongoing pause include.
- Inflation. SARB has revised up the contribution from energy prices, given the rise in oil prices. Meanwhile, food prices are expected to ease in the coming months, but to pick up in 2024. This all contribution to headline inflation remaining elevated into 2024, but SARB did revise down the 2023 forecast from 6.0% to 5.9% after recent lower than expected CPI numbers. The trajectory of headline inflation continues to projected to move lower slowly and still hit 4.5% in 2025 (Figure 1). However, SARB do appear somewhat more comfortable with core inflation forecast at 4.9% in 2023 and 4.5% in 2025. This is somewhat counterbalanced by inflation expectations, which the SARB statement highlights remains above the mid-point of the inflation target on a number of different measures. This all suggests that the SARB lingering concerns over inflation remain.
- GDP Growth. SARB revised up the 2023 GDP forecast to 0.7%, due to a better trajectory of private investment. The household sector is also seen as resilient, with the debt service burden at normal rates and the SARB tightening not causing acute stress. Even so, the SARB kept the 2024 GDP growth forecast at 1.0%, which reflects the uncertainty over future power cuts and logistics constraints. For now the inflation picture is more important than the fine tuning of the 2023 GDP forecast.
- Tightening bias for now. The 3 to 2 split in the vote in September shows that the concerns within SARB remain similar to July, while the introductory statement also presented the same lingering concerns that the SARB highlighted in the July statement. Indeed, the governor in the statement did note serious concerns over inflation risks, which is somewhat more hawkish than July. Perhaps the pick-up in oil prices is the extra issue for the SARB board, especially as S Africa is still struggling with ongoing power crisis and a weak Rand as inflation shocks. This will likely sustain the tightening bias through the remainder of 2023/early 2024 and a serious debate could occur if WTI sustainably rises above $100 – not our baseline forecast. Our baseline forecast though is that SARB will not hike further, given the lagged impact of policy and as inflation is projected to be not too distant from 4.5%.
- SARB tempers 2024 rate cuts ideas. The SARB forecast for end 2024 repo rate has risen from 7.41% to 7.57% and end 2025 from 7.17% to 7.31%. This hints that SARB does not see as much easing in 2024, as was thought in the June and July forecasts. With 2024 headline inflation having been revised upwards, this tempering of 2024 rate cuts is understandable. Part of the picture for policy depends on the outcome of the 2024 election and subsequent policies. A small ANC majority or coalition government could slow decision making on dealing with the power cuts, while a surprise healthy ANC victory could allow the ANC to continue to reduce power cuts and the reduce the adverse growth and inflation impacts.