SARB Preview: A Divided Hike & Steeper Curve

Research evidence excerpt

SARB Preview: A Divided Hike & Steeper Curve

Idea

Exhibit 3 : SARB versus RMB Morgan StanleyMpossible (see Exhibit 11), and would be consistent with the asymmetric

macro forecasts

nature of the reaction function when the SARB is trying to drive inflation

expectations lower. This was precisely the logic behind the 'opportunistic

disinflation' strategy in the early stages of the target reform. We believe this

will again be the favoured strategy at this juncture.

Against this backdrop, we believe a 25bp increase in the policy rate is likely:

Results from our MS SAMM suggest that a cumulative tightening cycle of around Source: Stats SA, SARB, RMB Morgan Stanley Research forecasts; Note:

SARB forecasts from the previous MPC meeting shown in parenthesis .

50bp is the model-consistent response given the size of the supply shock unfolding.

The easing in financial conditions in recent months should cushion part of the

associated growth cost (Exhibit 4).

Beyond the next meeting, the key risk to our view hinges on whether the Fed

shifts to a tightening stance later this year: Our house view is that US inflation will

ease sufficiently to obviate the need for hikes. If we are wrong, we would look to

reconsider the domestic outlook through the rand, sovereign risk premia, capital

flows and inflation expectations channels. Our inclination would be to reassess the

timing of policy easing in South Africa, not to automatically pencil in additional

tightening. This was a clear point of debate throughout our recent London investor

meetings.

Markets are currently pricing around 17bp of tightening at the upcoming

meeting, with a cumulative ~55bp of hikes priced across the curve and a terminal

rate of approximately 7.55%. We continue to favour 1y1y–2y2y steepeners, as we