On the 19th of May, the SARB hiked the repo rate by 50 bps from 4.25% to 4.75%. The balance of preferences was not unanimous, with four members of the MPC voting for the announced increase while one member was in favour of a 25-bp hike. Upward revisions to the inflation outlook and narrowing financial conditions have now led to an accelerated policy normalisation path.
The SARB expects inflation to average 5.9% in 2022 from the previous forecast of 5.8% at the March 2022 meeting. Significant increases in food, fuel and administered price inflation remain catalysts to the SARB’s CPI outlook. Furthermore, the unabating Russia-Ukraine war coupled with a weaker exchange rate also suggests additional inflationary tailwinds over the near term.
Amid cascading global liquidity levels, higher interest rates are also deemed necessary in funding the fiscal deficit. However, this type of policy intervention needs to be measured against the state/fragility of the economy. Moreover, limitations in curbing cost-push inflation through interest rate policy can induce a growth negative trade-off when the economy is fundamentally weak. The domestic economy continues to be stifled by waning consumption levels, stretched labour markets, and muted investment expenditure programs. These growth headwinds have recently been worsened by rising Covid-19 infections, rolling electricity shortages, and the recent floods in the Kwa-Zulu Natal province. To this end, the SARB expects the local economy to grow by 1.7% in 2022, revised lower from 2% at the March MPC meeting.
Our view is that elevated inflation pressures appear less likely to be maintained by a moderating macroeconomic backdrop. Against this analysis, we anticipate a more gradual hiking cycle in the interest of sustainable economic recovery. Our interest rate views remain aligned with the implied policy path of the SARB’s QPM, but still in contrast with the excessively hawkish Forward Rate Agreement (FRA) market.
The Nedgroup Investments Cash Solutions fund range remains well positioned for the current hiking cycle, as we largely hold floating rate instruments which will all reset their interest rate coupons to the new higher rate within the next few weeks and months. This will serve as much needed relief to income investors following the deep interest rate cuts sustained at the height of the Covid-19 outbreak.
Taquanta Asset Managers