South Africa's central bank raised its main interest rate for the second time and said a gradual rise in rates will be sufficient to keep inflation expectations well anchored and thus moderate the future path of rates given the expected trajectory in inflation and upside risks.
The Reserve Bank of South Africa (SARB) raised its repurchase rate by another 25 basis points to 4.0 percent and has now raised it 50 points following a similar-sized rate hike in November, the bank's first rate hike in 3 years.
The Reserve Bank of South Africa (SARB) raised its repurchase rate by another 25 basis points to 4.0 percent and has now raised it 50 points following a similar-sized rate hike in November, the bank's first rate hike in 3 years.
Four members of the central bank's monetary policy committee voted for the rate hike while one member want to maintain the rate.
Although SARB's quarterly projection model shows the repo rate ending this year at 4.91 percent, then 5.84 percent in 2023 and 6.55 percent in 2024, the path is lower than forecast in November and the central bank reiterated the projection is only a broad guide to policy and changes with new data and risks.
"In this uncertain environment, policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook," SARB said, adding it would continue to look through temporary prices shocks and focus on potential second-round effects.
"Current repurchase rate levels reflect and accommodative policy stance through the forecast period, keeping financial conditions supporting of credit demand as the economy continues to recover," SARB said, adding adjusted for inflation the repo rate is projected to rise to 0.0 percent this year from minus 1.4 percent last year, then 1.0 percent in 2023 and 1.8 percent in 2024.
South Africa's economy rebounded strongly from the COVID-19 pandemic but SARB said damage to the economy from unrest in July 2021, cyber attacks and strikes had dented activity and it lowered its estimate of growth in 2021 to 4.8 percent from an earlier 5.2 percent.
Mirroring the expected slowdown in global growth this year after the strong bounce-back in 2021, SARB expects South Africa's gross domestic product to slow to growth of 1.7 percent this year, then 1.8 percent in 2023 and 2.0 percent in 2024.
"Global economic conditions are less supportive of emerging and developing economies now than they were for most of this past year," SARB said, saying higher global inflation is likely to accelerate the normalization of interest rates and balance sheet reductions by major central banks.
It cautioned that economies that failed to take advance of better global conditions or to reduce large macroeconomic balances remain vulnerable.
Like most countries, South Africa's inflation rate trended upwards in 2021 and hit a year-high of 5.9 percent in December from 5.5 percent in November, in the upper end of SARB's target range of 3.0 to 6.0 percent.
"The risks to the inflation outlook are assessed to the upside," SARB said, pointing to global producer prices and food prices, which could surprise again, while oil prices are well above forecasts.
Additional upside risks stem from higher domestic import tariffs, stronger services inflation and higher wage demands, with a particular risk from a faster normalization of global policy rates and quantitative tightening, which could lead to a reversal of capital flows from riskier assets, such as emerging market debt.
Inflation averaged 4.5 percent in 2021 and SARB raised its forecast for inflation this year to 4.9 percent from an earlier 4.3 percent, with inflation in the first quarter of this year peaking at 5.6 percent.
For 2023 inflation is seen easing to 4.5 percent and remaining the same for 2024.
