MNI SARB Review - March 2023: Jumbo Hike & Hawkish Rhetoric Wrong-Foot Markets

Executive Summary:

• The SARB raised interest rates by 50bp against a unanimous consensus call for a 25bp hike and market pricing pointing to even less than that.
  
• The 2023 outlook for headline inflation was raised to +6.0% Y/Y from +5.4%, with the SARB concerned about rising inflation expectations.
• Governor Kganyago suggested that the market was mistaken in doubting the SARB‘s resolve in fighting inflation.

MNI SARB Review - March 2023.pdf

The SARB took the market by surprise and voted 3-2 to raise interest rates by 50bp, defying a universal consensus call for a 25bp rate hike. The decision came on the back of a higher inflation forecast for this year, with Governor Lesetja Kganyago flagging upside risks to the price outlook. The central bank also warned against further currency weakness, which could exacerbate imported inflation. While signalling continued bias towards tackling excessive price pressures despite headwinds to economic growth, the Governor criticised analysts for misinterpreting previous communications and refused to rule out further hikes.

Market participants adjusted their positioning during Governor Kganyago’s press conference. The South African Rand surged, becoming the world’s best performing currency on Thursday, with spot USD/ZAR cracking through several notable technical support levels. The FRA curve shifted higher on hawkish SARB repricing, with 2x5 FRA vs. 3-Month JIBAR spread sitting at 22bp when this is being typed, as the focus turns to the central bank’s next monetary policy decision on May 25. In our interpretation, the SARB’s rhetoric on Thursday highlights the central bank’s strong determination to maintain inflation-fighting credibility. From previous communications, it was clear that the SARB prioritises its inflation mandate over any growth considerations and prefers to leave it to the government to tackle the systemic problems haunting South Africa’s economy. The SARB yesterday made it clear that its decisions on interest rates will be dictated primarily by incoming signals on inflation dynamics.