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Unexpected aggressive rate hike announced at MPC meeting

30 March 2023 Patrick Buthelezi, Economist at Sanlam Investments

The South African Reserve Bank (SARB) hiked the interest rate by an unexpected 50 basis points (bps) to 7.75%, reaching its highest level since 2009.

Three MPC members voted for 50 bps, while two preferred 25 bps. The committee has raised the borrowing cost by a cumulative 425 bps since November 2021 and monetary policy works with a lag. The monetary policy stance has moved into tightening territory.

The MPC was proactive as they started the rate hiking cycle while inflation was still within the SARB inflation target range at 5.0% during its November 2021 meeting. Inflation had deviated from the previous mid-point target of 4.5%. The SARB is clearly committed to bringing inflation down towards the mid-point.

Although headline consumer price index (CPI) reaccelerated to 7.0% in February 2023, the cyclical high is behind us. The SARB revised its inflation forecast significantly higher on the back of upward pressure on core goods and food prices. They forecast inflation to be sustained at around 4.5% from 4Q2024. It assesses the risk to the inflation outlook to still be biased on the upside. In terms of inflation expectations, real GDP revised marginally lower to 0.2% in 2023 on the back of extensive electricity outages and logistical constraints. The medium-term growth forecast has revised slightly upwards.

Looking ahead, the SARB will probably pause and assess the impact on inflation and the economy. This possibly marked the top of the hiking cycle. However, this will hinge on inflation prospects and global developments. The bar for policy easing is high; it would require inflation to slow and be sustained towards the mid-point.

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