SARB Preview: rates likely to stay on hold, inflation risks remain

When is the SARB MPC rates decision?

The South African Reserve Bank (SARB) will conclude its Monetary Policy Committee (MPC) meeting and announce its rates decision on Thursday the 21st of September 2023.

Will the SARB raise lending rates?

The SARB is expected to keep local lending rates steady. Expectations are that the MPC will maintain the repurchase rate (repo) at 8.25% and the prime lending rate at 11.75% while it looks to assess the delayed impact of recent tightening measures.
The Reserve Bank is however expected to maintain a hawkish stance due to inflation risks skewed to the upside. Among these risks are a slowdown of the global economy and ongoing US inflation concerns. Local risk factors include growing fiscal concerns and slow economic growth prospects which could negatively impact foreign direct investment and pressure the rand further.

The Inflation outlook

Inflation forecasts do account for rising fuel prices and increased domestic input costs, such as elevated electricity tariffs, load-shedding mitigating expenses and the continued depreciation of the rand. However, food prices are projected to continue their decline, held back by subdued global prices, weaker domestic demand, and higher inventory levels. Core inflation is expected to remain below 5%, as consumer demand wanes amidst higher interest rates.

Risk factors for food prices include including load-shedding, potential onset of El Niño, the local avian flu outbreak, and global food security uncertainties. These uncertainties arise from an increase in extreme weather events, the disruptive impact of the Ukraine conflict, and growing protectionist measures by multiple nations.

Despite these risks, inflation is predicted to remain relatively controlled and within the Reserve Banks targeted band. This inflation outlook follows the suggestion that the SARB has already taken notable measures to curb inflation from a demand side perspective. Supply-side economy risks are the main contributors to potential inflation, with demand-side pressures now considered highly unlikely.

The above chart highlights the recent month on month (annualized) trend of Consumer Price Index (CPI) inflation for South Africa.

The future of local lending rates

No further rate hikes are expected for the year, with an outside probability of a 25-basis point (0.25%) cut at the end of 2023. Rates are however expected to ease in 2024. This suggests we could see rates lower by 100 to 125 basis points (1% to 1.25%) by the end of 2024, although this is far from certain.

South Africa 40 Cash Index

The short criteria highlighted in our previous note came to fruition resulting in the South Africa 40 Cash Index trading directly to the 67400-support target. Part of the move would however have been attributed to the large cash adjustment from the dividend in the underlying (330.8 points).

The price has since rebounded, although could be forming a new bearish price reversal ahead of what is a news heavy week.

A close below 68500 would confirm the reversal, placing 67400 as the initial support target once again. In this scenario, a close above 68900 might be used as a stop loss consideration.

Large cash adjustment expected

While considering exits, traders will want to note that the South Africa 40 Cash Index is expected to adjust for a dividend in the underlying, currently expected to be around 176.9 points. The adjustment will take place late Tuesday afternoon (19 September 2023).

High impact data expected

Traders will also take note of high impact data scheduled this week which could have a material effect on global index movements, including the South Africa 40 Cash Index. Amongst these key data points are Wednesdays US Federal Reserve, Thursday’s Bank of England’s, and the South African Reserve Bank’s rate decisions.

South Africa 40 Cash Index (Previous)

After reaching the lower support target (67400) suggested by the bearish flag and reversal off resistance, the South Africa 40 Cash Index has rebounded from oversold territory to find resistance on the 68500 level.

Short setup considerations

At the time of writing the price is now reversing off the 68500 level. A bearish reversal would be confirmed should today’s (12 September 2023) price close below the halfway mark of the preceding green candle. In this scenario 67400 becomes the initial support target while traders might use a close above 68500 as a stop loss indication.

Long setup considerations

Traders looking for long entry, might instead hope to see a close above the 68500-resistance level before targeting a move towards the 69760-resistance level. In this scenario, a close below the 68000 level might be used as a stop loss consideration for the trade.

Large cash adjustment expected

While considering exits, traders will want to note that the South Africa 40 Cash Index is expected to adjust for a dividend in the underlying, currently expected to be around 330.8 points. The adjustment will take place late Tuesday afternoon (12 September 2023).

High impact data expected

Traders will also take note of high impact data scheduled this week which could have a material effect on global index movements, including the South Africa 40 Cash Index. Amongst these key data points are Wednesdays US CPI inflation data, as well as Thursday’s European Central Bank’s (ECB) rate decision.