South Africa

South Africa Monetary Policy May 2022

South Africa: SARB delivers larger-than-expected hike in July

At its 21 July meeting, the Monetary Policy Committee of the South African Reserve Bank (SARB) voted to increase the repurchase rate by a further 75 basis points, bringing it to 5.50%. The move, which came on the heels of May’s 50 basis point increase, surprised analysts on the upside; markets had priced in another 50 basis point rise. The decision regarding the size of the hike—the fifth consecutive increase since policy normalization started in November 2021—was once again not unanimous: One of the five members preferred a 100 basis point increase, while another voted for a 50 basis point hike.

The decision was driven by the Bank’s upward revision of its headline inflation expectations to 6.5% and 5.7% for 2022 and 2023, respectively. Moreover, core inflation projections have been upwardly revised again for this year, as well as for 2023 and 2024 amid predictions of stubbornly high prices for fuel and food. The Bank reiterated that risks to the inflationary outlook remain skewed to the upside. Meanwhile, the SARB now sees the economy expanding 2.0% this year, up from May’s forecast of a 1.7% GDP increase, giving the Bank room to continue its tightening cycle.

With regard to future policy moves, the SARB’s tone was largely unchanged and reiterated its commitment to stabilize inflation expectations around the midpoint of its 3.0–6.0% target band and hit that target by 2024. The Bank noted that “economic and financial conditions are expected to remain more volatile for the foreseeable future,” and that, therefore, “monetary policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook”. The SARB added that it will “seek to look through temporary price shocks and focus on potential second round effects and the risks of de-anchoring inflation expectations”.

The next monetary policy meeting is scheduled for 22 September.

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