The South African Reserve Bank (SARB) today lifted the repurchase rate (repo rate) by 25 basis points to 3.75%, triggered by the risky outlook on inflation over the medium term.
This is the first interest rate hike in three years due to increased inflation risks and despite a still fragile economic recovery.
This was the first time SARB hiked interest rates in more than a year after the central bank eased rates to shore up the impact of the Covid-19 pandemic on the economy.
The prime lending rate of commercial banks now rises to 7.25%.
SARB governor Lesetja Kganyago said the decision to leave interest rates unchanged was split as three members of the monetary policy committee (MPC) preferred an increase while two preferred an unchanged stance.
Kganyago said that while the MPC expected inflation to stay close to the midpoint over the forecast period, inflation risks had increased and the level of policy accommodation remained high.
SARB revised the headline forecast slightly higher to 4.5% in 2021, and 4.3% in 2022, while market-based surveyed expectations were broadly unchanged.
“With ongoing global supply shortages and strong demand, a wide range of prices continue to accelerate, including raw materials, intermediate inputs and food,” Kganyago said.
“Oil prices are revised up for this year, and fuel price inflation is higher at 17.6%. Local electricity price inflation for 2021 remains at 10.1%, while the forecast for 2022 and 2023 is revised up to 14.4%.”
The move towards monetary policy normalisation comes amid increasing concerns about rising global inflation on higher fuel prices.
Meanwhile, SARB lowered South Africa’s gross domestic product (GDP) projections to 5.2% in 2021, down from 5.3%, but kept unchanged at 1.7% in 2022.
It said the July unrest, the pandemic and ongoing energy supply constraints were likely to have lasting effects on investor confidence and job creation, impeding recovery in labour-intensive sectors hardest hit by the lockdowns.
BUSINESS REPORT ONLINE