Macro Analysis /
South Africa

SARB hikes again but signals slower normalisation going forward

  • Tone of the meeting was less hawkish than many expected

  • Inflation forecasts revised higher but growth outlook weaker

  • Market pricing for future rate hikes still looks excessive

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Danny Greeff
Kieran Siney
Takudzwa Ndawona
ETM Analytics
27 January 2022
Published byETM Analytics

Bottom line

  • Matching consensus expectations, the SARB opted to hike the repo rate by 25bps to 4.00%. The vote was 4-1 in favour of a 25bps hike, with one member voting for an unchanged rate decision. The decision came as the central bank sees risks to the inflation outlook as tilted to the upside while the medium-term domestic growth outlook is assessed to be balanced.

  • A key takeaway from the policy statement was that the year-end repo estimates for this year and next were revised lower in the QPM. Specifically, the SARB model now sees the Repo rate at 4.91% at the end of 2022 vs. 5.17% and at 5.84% in 2023 vs. 6.04% previously expected.


  • The inflation forecast generated by the QPM was revised higher with respect to the previous meeting. Headline inflation is expected to average 4.9% this year vs. 4.3% previously and then remain at 4.5% in 2023 and 2024. The SARB assessed the risk to the inflation outlook to be to the upside amid higher global food and oil prices, currency volatility, and capital flow reversal as global financial conditions tighten.

  • The SARB’s assumption is that oil prices will average at around $75 per barrel in 2022. Our view is that the risk to this forecast is to the upside, given that Brent is nearing $90 per barrel at the moment and could easily reach $100 per barrel. Supply constraints are a major driver of prices at the moment, and these will not be alleviated anytime soon as OPEC members struggle to increase output. The inflation risk from higher than estimated oil prices is, therefore, something to note.

  • Administered prices also pose an upside risk to the inflation outlook. Specifically, water and electricity point to more persistent price pressures even as oil price base effects dissipate later in the year. Note Eskom is calling for a 20.5% tariff increase for the coming financial year. The SARB’s forecast is for a 14.5% increase.

  • As important as it is to contain inflation expectations, the SARB will not want to fall behind the global rates cycle for fear that it may induce further volatility in the ZAR and exacerbate price instability. The SARB expects some global rate hikes at the beginning of June 2022.

  • While the last year saw the ongoing recovery of the South African economy from the pandemic, there was damage caused by the July unrest, cyber-attacks, and strikes. Those factors led to a downward revision to the growth forecast for the year as a whole, from the 5.2% forecast in November to 4.8%. This year and next year, economic growth is forecast to remain well above a low rate of potential growth. Specifically, the economy is expected to grow by 1.7% in 2022, 1.8% in 2023, and 2.0% in 2024. Overall, the risks to medium-term domestic growth are assessed to be balanced.

  • These downwardly revised growth estimates suggest that the output gap will be more negative than previously expected. This supports the case for a gradual path of policy normalisation in order to support the economy for as long as possible.

Going forward

  • Domestic inflation has strengthened, which supports the argument for further monetary tightening. However, economic growth expectations are still weak and while inflation forecasts have been revised higher, they remain within the target range, while core prices estimates are below the mid-point of the target for 2022.

  • As such, it is unlikely that the SARB will move more aggressively, given the weak state of the underlying economy and the persistently weak credit cycle, which will help contain inflation going forward. We are, therefore, of the view that the market might be currently too aggressive in its pricing of rate hikes at present.

  • The SARB will continue to shift incrementally and take onboard the latest data as it arrives to gauge whether it has done enough to contain inflation or whether it needs to do more.