Macroeconomic updateSouth AfricaStrategy

13 June 2022

South Africa is Catching a Cold

In brief

  • Monetary tightening decisions are currently a balancing act between combating record-high inflation and not triggering an economic recession i.e. soft landing. As the global economy is still in a tight spot, South Africa is at the centre of its cross-current of shocks.
  • However, the country’s large and diversified economy, effective monetary – and more recently fiscal–policy framework, and deep financial sector are buffers against these budding shocks – that include the direct exposure to the Russia-Ukraine conflict through higher inflation.
  • Hence, the South African Reserve Bank (SARB) once again hiked the repurchase (repo) rate at its May meeting to 4.75%, from 4.25% so as to douse these inflationary flames.
  • Although the inflation reading of 5.9% y/y for April is still within the SARB’s target range, the outlook is tougher, as we expect price pressures to prove more challenging from mid-year.
  • The SARB’s policy decision reinforces the bank’s hawkish stance on inflation, and its commitment to remain an attractive investment destination in the face of an unprecedented number of headwinds that will keep financing conditions tight and steepen the yield curve for rand-denominated bonds.
  • Being a risk-sensitive currency, the rand will also actively respond to shifting global risk appetite that will be driven by interest rate trends in the United States (US), the residue of the Russia-Ukrainian conflict, and the China situation with renewed COVID-19 lockdowns and harbour lockdown measures.