Rates hike decision likely to be supportive of SA Government Bonds

22 July 2022

Our initial view of the South African Reserve Bank’s (SARB) meeting was as hawkish as we could possibly have anticipated. The Monetary Policy Committee made history by hiking the repo rate by 75 basis points from 4.75% to 5.5%. This marks the largest hike by the SARB since Tito Mboweni increased the policy rate by 100 basis points in the 2002/2003 cycle when the repo rate was still in the double-digit territory. Given the current base level of rates, the 75 basis points hike can be classified as an outsized hike. This decision came against the market consensus of a 50 basis points hike within the economist community. The Forward Rate Agreement (FRA) market, however, was accurate with the 1x4 FRA pricing a hike of this magnitude ahead of the meeting.   

As a result, we saw the rand appreciate with the USDZAR moving -0.5% on the day. But SA Government Bonds (SAGBs) stole the limelight as the bond curve flattened very aggressively due to the market applauding the action as a noteworthy decision to get ahead of domestic inflationary pressures. The R2035s out to bonds maturing in 2048 rallied close to 30 basis points on the day to post over +2.4% returns. We believe that the SARB opted for a larger hike to front-load against the rising inflation expectations survey from the Bureau for Economic Research and the rising inflation forecast profile from their quarterly projection model. This move is likely to be very supportive of SAGBs and the rand into month end. We expect to also see an increase in SA weight in the JPM GBI EM Index and R41 billion of coupon payments lend additional support to bruised bond investors.