The South African Reserve Bank (Sarb) has delivered a shocking increase in the repurchase rate (repo rate) due to runaway inflation and the depreciating rand.
The Sarb’s Monetary Policy Committee (MPC) today increased its benchmark interest rates for a fifth time in a row, this time by 75 basis points to 5.5 percent as the risks to the inflation outlook are assessed to the upside.
South Africa’s consumer inflation quickened to 7.4 percent in June from 6.5 percent in May, the highest in 13 years mainly driven by rising fuel and food prices stemming from geopolitical tensions.
This means that the prime lending rate will now increase to 9 percent.
In the second quarter of this year, headline inflation breached the target range of 3-6 percent and is expected to remain above it until the fourth quarter of 2024.
Sarb governor Lesetja Kganyago today said that 3 members of the MPC preferred the announced increase whilst 1 member preferred a 100 basis points increase and another member preferred a 50 basis point increase.
Kganyago said that higher than expected inflation has pushed major central banks to accelerate the normalisation of global policy rates, tightening global financial conditions.
Economic and financial conditions are expected to remain more volatile for the foreseeable future. In this uncertain environment, monetary policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook.
“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. The bank will continue to closely monitor funding markets for stress.”
The bank revised upwards its forecast of headline inflation for this year from 5.9 percent to 6.5 percent as higher food, fuel, and core inflation are expected to keep prices elevated.
Kgyanyago said that average surveyed expectations of future inflation have increased to 6.0 percent for 2022 and 5.6 percent for 2023.
“Global producer price and food price inflation continued to surprise higher in recent months and may do so again,” he said. Russia’s war in Ukraine is likely to persist for the rest of this year and may have significant further effects on global prices.”
However, the bank said this year the economy was expected to grow by 2.0 percent, revised up from 1.7 percent despite disruption in activity due to flooding in Kwa-Zulu Natal and more extensive load-shedding.
The economy is forecast to expand by 1.3 percent in 2023 and by 1.5 percent in 2024, below the previous projection of 1.9 percent for both years at the time of the last meeting.
BUSINESS REPORT