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The SA Daily 23 July 2018

Money market now more convinced of hikes

  • Last week, a hawkish SARB increased its inflation forecasts over the medium term, and its model showed a more aggressive monetary policy tightening forecast. These inflation forecasts (5.6% in 2019 from 5.2%, 5.4% for 2020 from 5.2%) exceed ours. The implied path of policy rates now reflects five 25 bps interest rate hikes projected by the end of 2020; previously, there were four.
  • We expect inflation expectations to be a key driver of monetary tightening. To this end, the SARB’s inflation forecasts are increasingly important. Despite the still benign inflation pressures, if the inflation trajectory should meet the SARB’s forecasts, a hiking cycle could start sooner than we currently expect.
  • Hawkish sentiment is being reflected in the money market too. After the SARB’s meeting last week, the money market still prices in two hikes in the next 12 months but now with more conviction (see Hawkish MPC holds steady of 19 July, by Elna Moolman).

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