South Africa: Caution is required for investment at this time
2022-11-28
■ SARB raises rates for the seventh consecutive meeting, with the policy rate reaching 7.00% for the first time in about seven and a half years.
■ Although South African financial markets have been stable over the past month, a sense of instability is expected to persist.
The South African Reserve Bank (SARB) held a monetary policy meeting on November 24. For the seventh consecutive meeting, the policy rate, the repo rate, reached 7.00% for the first time since May 2017. While the 75 basis point rate hike was in line with market expectations, the decision was not unanimous. Only 3 votes were in favor of a 75 basis point hike, while 2 votes were against a 50 basis point hike. Compared to the last meeting in September when opponents raised rates by 100 basis points, the market seems to have speculated that the pace of SARB rate hikes will slow down, despite the same 3-2 vote.
However, unlike the Brazilian Central Bank (BCB), which was the first to stop raising interest rates, SARB will continue to raise rates in the future. The Consumer Price Index (CPI) for October, released on November 23, rose 7.6% year-over-year, accelerating from the previous month (7.5% year-over-year). It still exceeds SARB's price target (3-6%). On November 1, SARB Governor Hanyaho acknowledged that "inflation expectations are not fixed around the midpoint of the target (4.5%)". The same point was mentioned after the November meeting, and it can be said that the intention to curb price increases has not wavered. In a statement, SARB said the risk of further upward price volatility is high. On the other hand, SARB has lowered its economic growth forecast, maintaining growth at a low 1% through 2025, and SARB remains cautious about a recession. SARB will likely continue to raise rates until the real interest rate, as measured by the "policy rate - CPI rate of change", rises to positive territory in the foreseeable future.
During this period, the rand remained firm as funds have recently flowed into South African financial markets. Over the past month (Oct. 24-Nov. 24), the South African rand has moved from a high of R18.4 to near R16.9 to the U.S. dollar. The exchange rate against the yen strengthened from the upper end of the 8.0 yen range to the middle of the 8.1 yen range. Over the same period, the FTSE/JSE All-Share Index, South Africa's main equity index, rose 11.2%, while the 10-year South African government bond yield fell from 11.05% to 10.15%. As the dollar continues to depreciate, it is evident that South Africa is watching the market more and more closely.However, a high degree of vigilance is still required for frequent rotating blackout plans or strikes that both have a negative impact on domestic demand. Overall instability in the overall South African financial markets is also expected to continue in the future.