The South African Reserve Bank’s Monetary Policy Committee (MPC) has voted to hike interest rates by 50 basis points, taking the repo rate to 4.75% per annum.
The hike was in line with most analysts’ forecasts, while a forecast report from Finder, citing 22 economists, academics, and property specialists, pointed to a 50 basis point hike.
Four members of the committee preferred the announced increase and one member preferred a 25 basis point rise in the repo rate.
The implied policy rate path of the bank’s forecast model, given the inflation forecast, indicates gradual normalisation through to 2024, though the bank stressed that it would make future decisions based on available data.
“Economic and financial conditions are expected to remain more volatile for the foreseeable future. In this uncertain environment, policy decisions will continue to be data-dependent and sensitive to the balance of risks to the outlook,” said Reserve Bank governor Lesetja Kganyago.
“The MPC will seek to look through temporary price shocks and focus on potential second-round effects and the risks of de-anchoring inflation expectations,” he said.
Kganyago said in a statement on Thursday afternoon (19 May) that the rate decision was based heavily on the global economic outlook, which has been negatively affected by Russia’s war in Ukraine, as well as the ongoing Covid-19 crisis, with further outbreaks in China.
“In recent months, the Omicron variant has transmitted globally and a major war started in Europe. The economic costs of the coronavirus generally continue to fall, as most economies remained open despite the rapid spread of the Omicron variant.
“China’s response to the new Covid-19 outbreak and the sustained invasion of Ukraine by Russia will, however, weigh heavily on global economic growth and contribute to higher inflation,” he said.
The war has impaired the production and trade of a wide range of energy, food and other commodities and will continue to do so for some time, the governor said. He stressed that global oil prices in particular have been significantly impacted and that they are likely to increase further.
“Electricity and other administered prices continue to present short- and medium-term risks. Higher diesel and coal prices may result in upward revisions to our electricity price forecast for 2023,” he said.
Locally, headline inflation has broken far beyond the mid-point of the SARB’s range, and is expected to break past the range in the second quarter at 6.3%.
As a result of higher global food prices, local food price inflation is also revised up and is now expected to be 6.6% in 2022 (up from 6.1%), and 5.6% in 2023 (up from 5.1%). Food price inflation is forecast to ease to 4.2% in 2024 – down from 4.4%.
The economy is expected to grow by 1.7% in 2022, revised down from 2.0% at the time of the March meeting. This is due to a combination of short-term factors, including the flooding in Kwa-Zulu Natal and the continued electricity supply constraints.
Growth in output in the first quarter of this year is expected to be 3.6%, stronger than the 3.2% expected at the time of the March meeting.