CEEMEA Economics & Strategy Daily: There is only one game in town, CBT hold rates, SARB surprises market

Research evidence excerpt

CEEMEA Economics & Strategy Daily: There is only one game in town, CBT hold rates, SARB surprises market

n 2H and expect the policy rate to reach

35% by year-end.

Beyond the near-term rate outlook, we believe that the limitations of the current

framework, which has been relying predominantly on the exchange rate anchor

to do the heavy lifting on disinflation, are becoming increasingly evident amid

slowing activity and persistently elevated inflation. The exchange rate-based

strategy has proven more effective in moderating goods inflation than services

inflation, where domestic demand conditions, wage dynamics and backward-

looking indexation continue to exert upward pressure. The resulting divergence

between goods and services disinflation has not only complicated the path toward

the inflation target, but also revived competitiveness concerns, which are likely to

be exacerbated by higher energy prices. Against this backdrop, the CBT has

adjusted the pace of depreciation under its current managed crawl regime--an

action that, in our view, is unlikely on its own to meaningfully alleviate growing

competitiveness pressures (Figures 2 through 4). Given the secular nature of the

deterioration in price dynamics, we believe that achieving a more durable

disinflation would require a broader policy package supported by fiscal restraint, a

prudent incomes policy and structural reforms. Concurrently, the absence of a

clearly articulated exit strategy from the current framework continues to add

uncertainty surrounding the outlook. The noted challenging backdrop is also

reflected in the elevated currency risk premium, which is largely driven by concerns

over durability of the current exchange-rate regime rather than the volatility of its

path.