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MPC November 2021

The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) decided to increase the repo rate by 0.25% this month, with three members of the Committee voting in favour of an increase and two in favour of keeping rates unchanged. The market was divided in terms of expectations, but this move is in keeping with the trend across emerging market countries, many of which have already begun to hike interest rates.

The decision to increase rates reflects the Committee’s view that although inflation should remain near the mid-point of the target band, inflation risks have increased. Global inflation has been surprising to the upside, while the price of oil has risen sharply. Locally, the price of electricity is set to rise steadily over the next few years, with administered prices also posing some upside risk.

The SARB has revised its growth forecast for this year down fractionally, from 5.3% to 5.2%, and still expects a third quarter contraction to be followed up by a fourth quarter rebound. Beyond this year, more subdued growth of around 2.0% per annum is expected, with risks to outlook being to the downside.

Looking ahead, we anticipate that further interest rate hikes are on the cards, but we expect the hiking cycle to be gradual. The Reserve Bank’s Quarterly Projection Model currently expects interest rate hikes during every quarter for the next three years, which seems somewhat aggressive at this stage, but we recognise this will be sensitive to global inflation dynamics and policy settings.

By Reza Hendrickse, Portfolio Manager at PPS Investments