In brief
- The South African Reserve Bank (SARB) raised the repo rate by 50bps, higher-than-market consensus of 25bps, in its March MPC meeting. This brings the policy rate to 7.75%.
- The SARB pushed back against the market’s characterization of the rate hike as an insurance premium; the idea that the rate hike will give the central bank much wiggle room for future deep cut(s). Amidst a banking sector turmoil that is threatening to destabilize the financial sector, the SARB reiterated its price stability mandate as its overriding consideration.
- It also downplayed concerns that recent banking turmoil roiling developed markets will have a direct impact in the domestic market. For one, the central bank waved off ‘financial dominance’ considerations in its policy discussions.
- It was clear that judgment was critical in the latest rate decision. With terminal rate (2025 neutral interest rate: 7.00%) from its Quarterly Projection Model (QPM) lower than the current policy rate, the statement admitted that its monetary policy stance is “now less accommodative”.
- Amidst a less-desirable inflation outlook and a pivot to a sluggish growth environment, perhaps a case is to be made that the SARB would have taken a more benign policy response. We thus believe that the SARB would like to fortify its credibility as an inflation-fighting central bank.
- The central bank estimates the FX pass-through at 0.13, partly reflecting the broad-based currency weakness of South Africa’s trading partners. Although the current account balance has flipped into negative territory, our assessment is that the risk of external financing pressure is moderate. Nonetheless, as ZAR is relatively tradeable compared to its African peers, swings in investor sentiment resulting in portfolio outflows will continue to pose a major risk to the currency.
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