MPC January 2022

The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) once again raised the repo rate by 0.25% this month, with four members of the Committee voting in favour of an increase and one in favour of keeping rates unchanged.

The decision to increase rates reflects the Committee’s view that there are upside risks to inflation, which for now is expected to be above the mid-point of the target band this year. These risks include the prospect of tighter financial conditions globally, in response to what could be enduring inflationary pressures. In addition, oil prices are rising steadily, alongside elevated electricity and administered prices locally.

The SARB once again revised its GDP growth forecast for 2021 downwards, from 5.2% to 4.8%, with better than expected fourth quarter growth having been more than offset by worse than expected third quarter growth. Going forward, growth is expected to decelerate to 1.7% this year which, although subdued, is in fact above our potential growth rate of 0.8%, according to SARB estimates.

Looking ahead, we anticipate that further interest rate hikes will be forthcoming, and the Reserve Bank’s Quarterly Projection Model projects this normalisation to occur through to 2024. Although the path of rates is expected to be a gradual one higher, the spotlight will no doubt be on the US, where current market concerns are that the US Federal Reserve is potentially behind the curve.