Finance

The People’s Bank of China deleted several phrases in its latest monetary policy report, a move that economists say signals a shift toward easier policy.
The phrases had signaled a level of restraint in central bank policy, despite signs of growing slowdown in the economy.
However, the PBoC maintained a tough stance on the property market, which has struggled in the wake of Beijing’s crackdown on real estate developers’ high debt levels.

People walk past the headquarters of the People’s Bank of China (PBOC), the central bank, in Beijing, China September 28, 2018. 
Jason Lee | Reuters

BEIJING — China’s central bank removed several phrases on policy restraint in a quarterly report, a move economists said may be a sign that stimulus is on its way.
The People’s Bank of China has kept monetary policy little changed since China shook off the worst of the pandemic’s impact last year. Economic growth has slowed in the last several months amid a regulatory crackdown on the property sector, power shortages at factories and lackluster consumer spending.

The PBOC’s third quarter report on monetary policy released late Friday left out a reference to how the central bank would not engage in large-scale, flood-like stimulus. It’s a phrase that indicates policy restraint and has appeared in central government statements since at least 2019, before the pandemic.
“In our view, these deletions represent an official change to the PBoC’s policy stance and sets the stage for more decisive monetary and credit easing,” Ting Lu, chief China economist at Nomura, said in a report Sunday. He noted that China is in its worst economic slowdown since 2015, excluding the initial outbreak of the Covid-19 pandemic.
Lu pointed to other deletions, including one about controlling money supply — a measure of cash and other easily usable currency. Expanding the money supply typically stimulates spending in the economy.

The deleted reference to money supply was first made in a report in November 2020, when the central bank was about to wind down pandemic-era stimulus, Larry Hu, chief China economist at Macquarie, said in a note Sunday.
“This time, the removal of the phrase set[s] the stage for a step-up in monetary easing,” Hu said.

In a section about keeping monetary policy flexible and targeted, the PBOC also deleted a reference to maintaining “normal” monetary policy.
Hu said the PBOC has turned more cautious on the outlook for inflation. Although a sub-head in the central bank’s latest report still described pressure from rising prices as “controllable,” the authors deleted a reference to how there was no basis for long-term inflation or deflation.

Little change on property curbs

Even with these signals, economists expect Beijing will move stealthily.
The PBOC on Monday kept its benchmark lending rate unchanged for a 19th straight month since April 2020.
“I don’t think there is a major shift in monetary policy,” Bruce Pang, head of macro and strategy research at China Renaissance, said in Chinese, according to a CNBC translation.
Instead, deleting these rather “absolute” statements gives policymakers more space for future operations, Pang said, noting policymakers have used not used the phrases much in the last month or so.

We believe the worst for both the property market and the overall economy is yet to come, and only then (perhaps in spring 2022) will we see some real changes to the property curbs.

chief China economist, Nomura

Despite growing concerns about the economic slowdown, the PBOC maintained its strict stance on the property market — which, along with related industries, accounts for about a quarter of China’s economy.
Industry giant China Evergrande has teetered on the edge of default in the last few months following Beijing’s efforts to reduce real estate developers’ reliance on high debt levels for growth.
The central bank said in Friday’s report that risks in the real estate market remained controllable, and the overall healthy development of the industry would not change.
“We believe the worst for both the property market and the overall economy is yet to come, and only then (perhaps in spring 2022) will we see some real changes to the property curbs,” Nomura’s Lu said.

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A trader during the Sweetgreen initial public offering (IPO) in front of the New York Stock Exchange (NYSE) in New York, on Thursday, Nov. 18, 2021.
Michael Nagle | Bloomberg | Getty Images

Stock futures rose slightly in overnight trading on Sunday ahead of the holiday-shortened week, a historically seasonally strong period for Wall Street.
Futures on the Dow Jones Industrial Average gained 55 points. S&P 500 futures edged up 0.1% and Nasdaq 100 futures climbed 0.2%.

U.S. markets will be closed Thursday on Thanksgiving Day. The stock market closes early at 1 p.m. ET on Friday.
Stocks have a track record of posting gains in Thanksgiving week, which will potentially set the stage for a year-end Santa rally.
Since 1950, the last five trading days of November have been traditionally positive, according to Sam Stovall, chief investment strategist at CFRA. Meanwhile, there’s a two-thirds likelihood the market is up on the day before Thanksgiving Day and a 57% chance the day after the holiday, the strategist said.
One big market-moving event this week will be President Joe Biden’s nomination for the next Federal Reserve chief.

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Biden is expected to announce his pick in the coming days, with current chairman Jerome Powell and Governor Lael Brainard considered the most likely candidates. Many expect a more dovish central bank if Brainard prevails, meaning it would take longer to tighten policies including raising interest rates.

“I do think in the shortened week, that is probably going to be the biggest driver of market action,” said Jeff Schulze, ClearBridge Investments investment strategist. “If Brainard is nominated as Fed chair, it wouldn’t be a surprise to me to see some near-term volatility. Usually, the market tests a Fed chair.”
The S&P 500 came off a winning week, up 0.3%, on the back of a slew of stellar earnings reports from big retailers and strong U.S. retail data. The tech-heavy Nasdaq Composite jumped 1.2% last week. The blue-chip Dow fell 1.3% during the period, however.
Month to date, the S&P 500 is up 2%, on track to post its second positive month in a row. The equity benchmark has gained more than 25% in 2021.
—CNBC’s Patti Domm contributed reporting.

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Long-term market bull Jeremy Siegel expects a serious pullback that it isn’t tied to the Covid-19 surge risks.
His tipping point: a drastic change in Federal Reserve policy in order to deal with hot inflation.

“If the Fed suddenly gets tougher, I’m not sure that the market is going to be ready for a U-turn that [chair] Jerome Powell may take if we have one more bad inflation report,” the Wharton finance professor told CNBC’s “Trading Nation” on Friday. “A correction will come.”
The consumer price index surged 6.2% in October, the Labor Department reported earlier this month. It marked the biggest gain in more than 30 years.
Siegel criticizes the Fed for being far behind the curve in terms of taking anti-inflationary action.
“Generally, since the Fed has not made any aggressive move at all, the money is still flowing into the market,” Siegel said. “The Fed is still doing quantitative easing.”
He speculates the moment of truth will happen at the Fed’s Dec. 14 to Dec. 15 policy meeting.

If it signals a more aggressive approach to contain rising prices, Siegel warns a correction could strike.

‘There is no alternative’

Despite his concern, Siegel is in stocks.
“I am still pretty fully invested because, you know, there is no alternative,” he said. “Bonds are getting, in my opinion, worse and worse. Cash is disappearing at the rate of inflation which is over 6%, and I think is going higher.”
Siegel anticipates rising prices will stretch out over several years, with cumulative inflation reaching 20% to 25%.

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“Even with a little bit of bumpiness in stocks, you have to be wanting to hold real assets in this scenario. And, stocks are real assets,” he noted. “All that which in the long run is going to maintain value.”
But it depends on the company.
He notes the inflation backdrop would create headwinds for tech high-flyers in the Nasdaq, which is at record highs and crossed 16,000 for the first time ever on Friday.
“If interest rates go up, the very high-priced stocks which discounts cash flows way into the future… [are] going to be affected because of the discounting mechanism,” he added.
Siegel attributes growth stocks’ record strength to Delta variant fears and falling Treasury yields. He predicts the Covid-19 surge will subside as more people get boosters.
“That has stopped the so-called reopening trade,” he said. “Value has gotten very cheap.”
If Siegel is right about an abrupt Fed policy change, he sees Wall Street getting over the shock of it fairly quickly and a new desire to own dividend stocks and financials in 2022.
“[Financials] have been selling off recently with the lower interest rates,” Siegel said. “They could come back.”
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THE FRISSON of relief among some of America’s most outspoken left-leaning economists is unmistakable. Whenever other countries report high inflation figures, they seize on it as evidence that America’s own bout of price rises is part of a global trend. “I hate to ruin the victory lap of all the people boasting that Biden’s Recovery Act would be inflationary, but the UK also had a big jump in inflation, with no big stimulus,” tweeted Dean Baker of the Centre for Economic and Policy Research, a think-tank, on November 17th. A few days earlier Paul Krugman, a Nobel-prizewinning economist, made a similar comparison between Europe and America. “What’s happening in the United States isn’t mainly about policy,” he concluded.That argument, if correct, carries extraordinary economic and political significance. Economically, the implication would be that inflation is largely out of the hands of American officials. They can take steps to help ports and highways flow more smoothly, but ultimately they, like their counterparts elsewhere, are hostage to pandemic-induced disruptions to global supply chains. Central bankers, in this view, should be cautious about increasing interest rates, as that would do nothing to boost production, the nub of today’s problems. And politically, it would insulate President Joe Biden from criticism that the giant spending package he launched earlier this year caused America’s price woes.Are these economists right? Is America’s inflation, now running at its fastest in three decades, global or homegrown? The case for the former is straightforward. Most rich countries, from Britain to Australia, face similar pressures. Even Germany, renowned for its aversion to price rises, has seen inflation race to a 28-year high.One common denominator is snarled supply chains, which have made everything from cars to furniture both scarcer and dearer. Another commonality is the pandemic’s lingering impact on the labour market. On November 19th Christine Lagarde, president of the European Central Bank, said that higher prices for services reflect job vacancies in contact-intensive workplaces such as restaurants. The diagnosis applies just as well to America. Simply put, life is not yet back to normal, and inflation is a symptom.This global perspective is unquestionably important. Yet it is insufficient: inflation is now higher in America than in any other advanced economy, by some distance. Although consumer prices in America rose by 6.2% in October compared with the year before, faster than in other big rich economies, year-on-year comparisons are flawed because of variations across countries in the timing of their pandemic-induced slowdowns and recoveries. The clearest comparison is instead to look at prices today and those 24 months ago. On this basis, consumer prices are up by about 7.5% in America, more than two percentage points higher than anywhere else in the G7 group of rich countries (see chart 1).The case that this is at least partially homemade points to America’s unusually forceful pro-growth policies throughout the pandemic. These started with the stimulus cheques that President Donald Trump proudly signed and grew even more generous with Mr Biden’s American Rescue Plan. Over the course of 2020 and 2021 America’s fiscal deficit is on track to average about 14% of GDP, according to projections from the Congressional Budget Office. As with inflation, that is higher than in any other G7 country.The Federal Reserve has also stood out for its ultra-loose policies, such as its bond-buying. The assets on the Fed’s balance-sheet have doubled over the past two years as a share of GDP. This month the Fed started to pare back bond purchases, but financial conditions remain extremely loose, with real interest rates well into negative territory.The remarkable degree of stimulus helps explain the boom in American retail sales. There is no doubt that the pandemic has shifted consumption from services towards goods. Yet even allowing for this distortion, the American data are jaw-dropping. In the second quarter of 2021 spending on durable goods was roughly a third higher than in the final quarter of 2019, far above its previous trend and easily outpacing the increases in other big economies (see chart 2).Indeed, buoyant American demand may well have exacerbated global shortages and spilled over into higher inflation elsewhere. Consider maritime shipments. Port throughput in America was 14% higher in the second quarter of 2021 than in 2019. Other parts of the world have been more subdued: throughput in Europe was 1% lower. But shipping rates everywhere have soared as capacity has been diverted to transpacific trade.It’s never too lateRecognising that inflation in America stems in part from its stimulus policies does not mean that those policies were necessarily bad. They were directly responsible for the vigour of its economic rebound and its rapid drop in unemployment. Yet as time goes on, the downsides of supersized stimulus are becoming more apparent. Inflation is already eroding the real value of big wage gains for low-income Americans. The threat of a wage-price spiral, not seen in America since the 1970s, looms over the recovery.If ultra-loose policies helped cause inflation in the first place, it stands to reason that tighter policies ought to figure in the solution. The Fed is gradually moving in that direction. On November 19th two of its governors, Richard Clarida and Christopher Waller, speaking at separate events, said that the central bank’s next meeting in December may include a discussion on whether to scale back its monthly asset purchases more swiftly. That, in turn, would clear the path for interest-rate increases in the first half of 2022, sooner than many economists expect.Mr Biden, for his part, has adjusted his tone on inflation. As recently as July he described the jump in prices as temporary, a by-product of the pandemic. In recent weeks he has instead been forthright in saying how much inflation hurts Americans and declaring that “reversing this trend is a top priority”.What can the president do to lower prices? Some of his actions have been more performative than substantive. On November 17th Mr Biden asked the Federal Trade Commission to investigate whether oil and gas companies had colluded in raising prices at the pump. Past such investigations have yielded little. On November 9th the White House announced an “action plan” to expand port capacity, but that could take years to bear fruit. Mr Biden could remove tariffs on Chinese products to help lower import prices. Yet that could be construed as a win for China, politically untenable in America these days.In one respect, however, Mr Biden has done the right thing, if only by default. As his pandemic stimulus expires, fiscal policy is naturally getting stingier. The Hutchins Centre, a think-tank, calculates that this tightening could lop about two percentage points off America’s growth rate next year. Critics have argued that an ambitious social-spending and climate package—the cornerstone of Mr Biden’s agenda, currently wending its way through Congress—would add to inflationary pressures. But its investments will be spread out over a decade, adding up to less than 1% of GDP each year. That will deliver only a modest upfront kick to growth and have a negligible impact on prices. “My landmark legislation is relatively insignificant in the near term” would not make for a great political slogan. But after 18 months of big government spending, it is just what the American economy needs.For more coverage of Joe Biden’s presidency, visit our dedicated hub and follow along as we track shifts in his approval rating. For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

Moderna’s sign is seen outside of their headquarters in Cambridge, MA on March 11, 2021.
Boston Globe | Getty Images

Check out the companies making headlines in midday trading.
United Airlines, Boeing — Shares of travel-related stocks dipped after Austria announced earlier in the day that it would reenter a full national lockdown due to a spike in Covid cases. United Airlines fell 2.8% while American dipped 0.6%. Boeing fell 5.8%.

Devon Energy, Hess Corporation – The exploration and production companies slid more than 5%, leading the broader energy sector lower, amid a drop in oil prices. Every component in the S&P 500 energy sector traded in the red on Friday, with oil on track for its fourth straight week of losses.
Robinhood — Shares of the brokerage fell 5% after Deutsche Bank said it expects Robinhood’s customer accounts and assets will drop again in the fourth quarter and growth will continue to slow into 2022. For that reason, Robinhood is Deutsche Bank’s new “sell idea.”
Moderna — Shares of Moderna jumped 4.9% after the Food and Drug Administration authorized Moderna and Pfizer’s Covid vaccine booster shots for all U.S. adults. Pfizer shares were higher earlier in the session but closed 1.2% lower.
Foot Locker — Shares of the athletic footwear and apparel retailer tanked about 12% after the company said it expects global supply chain constraints to persist through this quarter. The sell-off in shares comes despite a beat on both the top and bottom lines for Foot Locker’s most recent quarter, as well as better-than-expected comparable store sales.
Applied Materials — Shares of Applied Materials retreated 5.5% after the semiconductor equipment maker missed on quarterly earnings estimates. The company reported adjusted quarterly earnings of $1.94 per share, one cent shy of expectations, and posted revenue below Wall Street projections. Applied Materials also gave a weaker-than-expected current-quarter outlook citing supply shortages.

Ross Stores — Ross Stores shares dipped 5.6% despite an earnings beat. The off-price retailer posted quarterly earnings of $1.09 per share, beating the 78-cent Refinitiv consensus estimate. However, the discount retailer said it was seeing significant supply chain issues and uncertainty heading into the holiday shopping season.
Workday — Workday shares fell 4.2% despite the software company’s better-than-expected earnings report. The company posted earnings of $1.10 per share, 24 cents better than the Refinitiv consensus estimate. Workday said the effects of the Covid-19 pandemic will weigh on growth in the coming year.
Buckle — Buckle saw its shares retreat 6.5% despite beating Wall Street estimates in its quarterly earnings report. The fashion retailer earned $1.26 per share for the quarter, beating the 92-cent Refinitiv consensus estimate.
Intuit — The business software stock jumped 10.1% after strong growth in online accounting revenue fueled a beat on the top and bottom lines for Intuit’s fiscal first quarter. The company reported adjusted earnings of $1.53 per share on $2.01 billion in revenue. Analysts surveyed by Refinitiv had penciled in 97 cents in earnings per share and $1.81 billion of revenue.
— CNBC’s Yun Li, Jesse Pound, Maggie Fitzgerald and Tanaya Macheel contributed reporting.

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House Democrats passed the Build Back Better Act on Friday. The legislation contains new rules on retirement plans for the wealthy.
The bill would create required minimum distributions for retirement accounts of more than $10 million, eliminate “backdoor Roth” loopholes and prohibit new contributions to large accounts.
The measures are part of a $1.75 trillion package to fight climate change and expand the social safety net.

U.S. Speaker of the House Nancy Pelosi (D-CA) speaks during a news conference following the passage of the Build Back Better Act, in the U.S. Capitol, in Washington, November 19, 2021.
Al Drago | Reuters

The House of Representatives passed legislation Friday that would curb how wealthy Americans use retirement plans.
The new rules are part of a broad restructuring of the tax code tied to the $1.75 trillion Build Back Better Act, which would represent the largest expansion of the social safety net in decades and the largest effort in U.S. history to fight climate change.

House Democrats passed the bill along party lines, 220-213. It now heads to the Senate.
More from Personal Finance:Billionaires like Peter Thiel may be spared big IRA tax bill in latest Build Back Better plan52% of workers feel they’re behind on retirement savingsRetirees are ‘unretiring’ — and that’s good for the labor market
Wealthy individuals with more than $10 million in retirement savings would have to draw down their accounts each year, in a new type of required minimum distribution, or RMD. Lawmakers would also close “backdoor Roth” tax loopholes, used largely by the rich, and prohibit further individual retirement account contributions once those accounts exceed $10 million.
The measures are aimed at curbing the use of 401(k) plans and IRAs as tax shelters for the wealthy.
They — along with tax provisions aimed at corporations and households making more than $400,000 a year — also raise revenue for universal pre-K, Medicare expansion, renewable energy credits, affordable housing, a year of expanded child tax credits and major Obamacare subsidies.

The retirement proposals were included in an initial House tax proposal in September. However, the White House stripped the retirement-plan rules from a legislative framework issued Oct. 28 after lengthy negotiations with holdout members of the Democratic party, who were concerned about some tax and other elements of the package.
Some of the earlier retirement proposals didn’t re-appear in the new iteration, however.
For example, the initial legislation would have disallowed IRA investments like private equity that require owners to be so-called “accredited investors,” a status tied to wealth and other factors. And some of the rules the House passed Friday would kick in years later than originally proposed.
The legislation is still subject to change in the Senate, where Democrats can’t afford to lose a single vote for the measure to succeed due to unified Republican opposition.

RMDs for $10 million accounts

Currently, RMDs for account owners are tied to age instead of wealth. Roth IRA owners also aren’t subject to these distributions under current law. (One exception: inherited IRAs at death.)
The House legislation would add to those rules, asking wealthy savers of all ages to withdraw a large share of aggregate retirement balances annually. They’d potentially owe income tax on the funds.

The formula is complex, based on factors like account size and type of account (pretax or Roth). Here’s the general premise: Accountholders must withdraw 50% of accounts valued at more than $10 million. Larger accounts must also draw down 100% of Roth account size over $20 million.
The distributions would only be required for individuals whose income exceeds $400,000. The threshold would be $450,000 for married taxpayers filing jointly and $425,000 for heads of household.
The provision would start after Dec. 31, 2028, according to the latest available summary of the legislation. (It would have begun after Dec. 31, 2021 in the September House proposal.)

Backdoor Roth

imagedepotpro | E+ | Getty Images

Roth IRAs are especially attractive to wealthy investors. Investment growth and future withdrawals are tax-free (after age 59½), and there aren’t required withdrawals at age 72 as with traditional pre-tax accounts.
However, there are income limits to contribute to Roth IRAs. In 2021, single taxpayers can’t save in one if their income exceeds $140,000.
But current law allows high-income individuals to save in a Roth IRA via “backdoor” contributions. For example, investors can convert a traditional IRA (which doesn’t have an income limit) to a Roth account.
Current law also allows for “mega backdoor” contributions to a Roth IRA using after-tax savings in a 401(k) plan. (This process lets the wealthy convert much larger sums of money, since 401(k) plans have higher annual savings limits than IRAs.)
The House legislation would address both.
Firstly, it would prohibit any after-tax contributions in 401(k) and other workplace plans and IRAs from being converted to Roth savings. This rule would apply to all income levels starting after Dec. 31, 2021.
Secondly, savers would be unable to convert pre-tax to Roth savings in IRAs and workplace retirement plans if their taxable income exceeds $400,000 (single individuals), $450,000 (married couples), or $425,000 (heads of household). It would start after Dec. 31, 2031.

IRA contribution limits

Current law lets taxpayers make IRA contributions regardless of account size.
However, the legislation would prohibit individuals from making more contributions to a Roth IRA or traditional IRA if the total value of their combined retirement accounts (including workplace plans) exceeds $10 million.
The provisions of this section are also effective for tax years beginning after Dec. 31, 2028. (As with the RMD provisions, they would have begun after Dec. 31, 2021 in the September House proposal.)
The rule would apply to single taxpayers once income is over $400,000; married couples over $450,000; and heads of household over $425,000.

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The House of Representatives passed the Build Back Better Act on Friday.
The $1.75 trillion social and climate bill would make the child tax credit fully refundable on a permanent basis. The change would especially help low earners.
The bill also preserved some temporary enhancements for one year. Parents could claim a credit of up to $3,000 or $3,600 per child, depending on their age, in 2022 and receive funds in monthly installments.

Speaker of the House Nancy Pelosi, D-Calif., speaks at a press conference, along with House Democratic leadership, after the House passed the Build Back Better Act on Nov. 19, 2021.
Anna Moneymaker | Getty Images News | Getty Images

The House of Representatives passed legislation Friday that would make the child tax credit fully refundable on a permanent basis, a change that would be of particular significance for low-income families.
The Build Back Better Act, which Democrats passed by a vote of 220-213, would also preserve some temporary enhancements to the credit for a year, through 2022.

The American Rescue Plan, which President Joe Biden signed in March, made the tax credit for parents fully refundable. That means low earners would get the full value of the credit regardless of their income or tax liability.
The $1.75 trillion House legislation would make this a permanent feature of the tax code — which experts say would especially help lower-income parents and cut the number of kids living in poverty.
More from Personal Finance:Restrictive retirement rules for the rich edge closerHouse Democrats pass spending package with $80,000 SALT capHouse passes bill including paid family leave
Prior to the pandemic-relief law, low earners could only get part of the tax break (up to $1,400) as a refund, while higher earners would get its full value. They also weren’t eligible for the credit if they made less than $2,500 a year.
The Build Back Better Act — which would be the largest expansion of the social safety net in decades and the biggest effort in U.S. history to fight climate change — now heads to the Senate for consideration.

Temporary changes

The legislation made other changes that, unlike full refundability, would be temporary.
The enhanced value of the child tax credit would be extended for another year, through 2022. Parents would get up to $3,000 per child under age 18, and an extra $600 per child under age 6.
The American Rescue Plan temporarily raised the maximum value of the credit from $2,000 per child to its current level, and expanded the number of households that qualify for the tax break.

The pandemic-relief law also allowed families to receive the funds in monthly installments this year, of up to $300 per child. The Build Back Better Act would continue that in 2022.
The federal government has issued $77 billion in total monthly payments from July to November this year, according to the Treasury Department.
However, unlike 2021, these advance payments would be restricted to families according to income. Monthly payments would be available to taxpayers with income below $150,000 (for married taxpayers filing a joint tax return), $112,500 (for heads of household) and $75,000 (single filers).

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The SARB hiked its main repo rate by 25 basis points to 3.75% from its record low.
The central bank raised its consumer price index forecast from 4.4% to 4.5% in 2021, and from 4.2% to 4.3% in 2022.
Jeff Gable, head of macro and fixed income research at Absa, said the hike had come earlier than many economists had expected, and showed the SARB’s concern about upside risks to inflation.

Lesetja Kganyago, governor of the South African Reserve Bank.
Waldo Swiegers/Bloomberg via Getty Images

The South African Reserve Bank has fired the starting gun on monetary policy normalization, but economists do not expect the hiking cycle to be plain sailing.
The SARB on Thursday hiked its main repo rate by 25 basis points to 3.75% from its record low amid growing concerns about upside inflation risks. The central bank raised its consumer price index forecast from 4.4% to 4.5% in 2021, and from 4.2% to 4.3% in 2022.

The hike marks the first step to unwinding 275 basis points of cuts implemented since the start of the Covid-19 pandemic, but the Monetary Policy Committee split its vote 3-2, indicating conflicting sentiments within the SARB as it looks to support the recovery while addressing inflation fears.
Headline consumer price index inflation was a modest 0.2% month-on-month in October, an annual climb of 5%.
In his statement, SARB Governor Lesetja Kganyago noted that elevated oil and energy prices pose upside risks to the short-term inflation outlook.
Jeff Gable, head of macro and fixed income research at South African bank Absa, told CNBC Friday that the repo rate rise had come a little earlier than many economists had expected, and showed the bank’s concern about upside risks to inflation. However, projections remain around the center point of the SARB’s target for now.
“We know that in South Africa we have tens of millions of vulnerable South Africans not really in a position to be able to protect themselves from inflation, and so [we have] a Reserve Bank here that has needed to be talking tough about inflation throughout the cycle,” Gable said.

“So this signal, this first rate rise a little earlier than we expected, is certainly an indication, I think, that they want to stay on top of it.”
A gradual hiking cycle
Gable said it remains to be seen whether the unwinding of the SARB’s accommodative position comes in successive policy meetings, or whether the market will be on tenterhooks each time the MPC gets together over the next couple of years.
Virag Forizs, emerging markets economist at Capital Economics, said in a note Thursday that the decision indicates a slower tightening cycle than markets had anticipated.
Kganyago said the MPC believes a “gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates.”
“This dovish bias probably helps to explain why the rand initially weakened against the dollar following the decision,” Forizs said.
“In addition, MPC members will probably want to keep monetary policy as accommodative as possible to continue supporting the economy.”
Capital Economics has penciled in 150 basis points of hikes over the next two years, with the repo rate rising to 4.5% by the end of 2022, and to 5.25% by the end of 2023.
By contrast, Forizs highlighted, the market is pricing in around 250 basis points of hikes within the next 18 months.
Growth outlook clouded
The economic recovery has been rocky thus far. Covid lockdown measures and pockets of civil unrest have weighed on activity at various points throughout the past two years.
While the SARB expects annual GDP growth of 5.3% in 2021, it has sharply lowered its 2022 projection from 2.3% to 1.7%, and 2023 from 2.4% to 1.8%.
What’s more, the country is battling to implement fundamental economic reforms after years of sluggish growth. Education, infrastructure, labor, public sector wages and the privatization of state-owned enterprises are all on the table in discussions.

South African President Cyril Ramaphosa visits the coronavirus disease (COVID-19) treatment facilities at the NASREC Expo Centre in Johannesburg, South Africa April 24, 2020.
Jerome Delay | Reuters

However, Gable noted that divisions within the ruling ANC party have caused a “logjam” that has rendered progress difficult.
“A South Africa that grows 1.75 to 2% over the medium term is not a South Africa that is growing fast enough to bring about meaningful change to the social challenges in the country, the inequality in the country,” he said.
“So we would expect, I suppose, a ratcheting of tensions, a ratcheting of pressure for change, but still this concern about just where the agreement is as to what direction that broader change needs to take.”
Conflicting views on the rand
JPMorgan on Friday cut its position on the South African rand to “underweight” from “middleweight,” citing its vulnerability to rising core bond yields.
“In South Africa, 2021 was a year of largely ‘good news’ — we see more risks in 2022, with FX most exposed,” JPMorgan emerging markets strategists said.
They noted that weakened support from terms-of-trade — a measure of a country’s export prices against its import prices — has driven the dollar back to year-to-date highs against the rand. As of Friday afternoon, the dollar would buy around 15.73 rands.
JPMorgan sees scope for further weakness, with the current account — which represents a country’s imports and exports of goods and services — expected to deteriorate in 2022.
As of September, South Africa’s current account surplus widened to an all-time high of 343 billion rand ($21.8 billion) on the back of a stronger trade account and record merchandise exports.
Gable disagreed with this prognosis, however, suggesting the tailwind from the country’s current account surplus will be more durable than expected.

“Part of [the surplus] is because commodity prices have been favorable. The mix of commodity price moves over the last couple of months has been a little bit less helpful to South Africa, but it doesn’t diminish the surplus that we expect to run going forward,” Gable said.
“That should provide, broadly, support for the rand even in an environment where globally, the world might be turning a little bit more against emerging markets.”
Absa expects a gradual weakening of the rand on a trend basis over the next two years, from a starting point at the end of 2021 of “somewhere in the early 15s to the dollar.”

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