SARB continues to deliver on its “gradual” normalization strategy

In line with the consensus and our forecast, the SARB MPC delivered a 25bp rate hike to 4.00% in its first of 6 meetings scheduled for 2022. 

More hawkish forecasts meets a more dovish QPM: Though the decision to hike was less split than November (4:1 in favour of a hike, as we flagged in  SARB to keep hiking rates as price pressures persist, dated 24 January), it was the implied repo rate path of its quarterly projection model (QPM) that probably surprised most, showing a step adjustment lower of 22bp (average) in its medium-term policy rate path. The SARB's QPM now indicates something closer to our base case of five 25bp rate hikes in 2022 and three 25bp hikes in early 2023 - with its end 2022 and end 2023 implied policy rates at 4.91% and 5.84% respectively. Importantly too, a 50bp rate hike was not discussed, further solidifying that it will for the time being adopt a "gradual normalization" approach. 

Sources: SARB, BNP Paribas 

Inflation estimates revised up: In line with our view, the SARB made upward adjustments to its 2022 CPI estimates which it now sees 0.6pp higher at 4.9% (vs our own 5.1%), but at the same time maintained a level of comfort with its 2023 CPI estimate well anchored at 4.5% (-0.1pp from November). Importantly, however, the SARB warned over the balance of risks to these estimates to now being assessed to the "upside" – citing global producer and food prices, higher oil, scope for higher domestic import tariffs and higher wage demands. Like our own projections, its belief that core CPI will remain well anchored below its 4.5% midpoint target we view as important in its comfort with maintaining a steady normalization pace. Indeed this is even true as the bank's 3.8% core CPI average for 2022 and 4.4% estimate for 2023 remained broadly unchanged in spite of a weaker USDZAR starting point of 15.60/USD (from 15.10 before) in its models.

...but larger negative output gap: A more negative output gap than before (the SARB sees a wider output gap persisting until 2024), we believe, to be the main reason behind the lower implied rate path of the QPM. Negative statistical carry-over from last year's Q3 riots coupled with a central bank that remains concerned over the acutely weak structural features of the economy we think explains this, even though the bank made no downward revisions to its 2022 (+1.7%) and 2023 (1.8%) GDP estimates or even its r-star assumptions which remain sticky at 2.3%. 

SARB to keep hiking, steadily: Given both the tone, assumptions and forecasts implied by the SARB in its January statement we remain comfortable in our above consensus call for 25bp hike increments in each of the SARB's next 4 MPC meetings, taking its end-2022 policy rate to 5.00%. We caution though that this is probably a minimum requirement in light of  tighter Fed policy and upside domestic inflation risks meaning that we think that this probably marks the low point in the SARB's QPM implied repo rate path, with the only way up from here.

Jeff Schultz is a Senior Economist, BNP Paribas South Africa.