The South African Reserve Bank (SARB) increased its benchmark repo interest rate by another 75 bps to 7% at its November 2022 meeting, as widely expected. Prime is now at 10.5%. This was the 7th consecutive rate hike as the SARB tries to tame inflation expectations more firmly around the mid-point of the target band and achieve the inflation target in 2024. South Africa’s inflation rate unexpectedly rose to 7.6% in October from 7.5% in September. The decision was not unanimous, three members of the MPC preferred 75bps, two preferred a 50bp increase.
South Africa like other emerging nations has to balance the rate differential with the US Federal Reserve raising rates, currency flight, inflation and growth risks.
“The revised repurchase rate remains supportive of credit demand in the near term, while raising rates to levels more consistent with the current view of inflation and risks to it. The aim of policy is to anchor inflation expectations more firmly around the mid-point of the target band and to increase confidence of attaining the inflation target sustainably over time,” SARB Governor Lesetja Kganyago said during a press briefing.
South Africa’s Markets Reaction
- The rand weakened against the dollar after the central bank decision. The rand traded at 17.0150 against the dollar, 0.29% weaker than its previous close.
- The benchmark all-share index closed 0.32% higher at 73,127 points, the blue-chip index of top 40 companies ended up 0.37% at 66,764 points.
- The government’s benchmark 2030 bond was slightly stronger with the yield down 4 bps at 10.155%.
South Africa Inflation
South Africa’s inflation rate unexpectedly rose to 7.6% in October from 7.5% in September, staying above the upper limit of the central bank’s target range of between 3% and 6% for the sixth straight month. The headline CPI forecast was revised up to 6.7% in 2022 (vs 6.5% in September) and to 5.4% in 2023 (vs 5.3%) but lowered to 4.5% in 2024 (vs 4.6%). Core inflation estimates were left unchanged for this year at 4.3% but revised higher to 5.5% in 2023 (vs 5.4%).
The Governor said local food price inflation was revised up due to the weaker exchange rate and was now expected to be 8.8% in 2022.
“Food inflation is revised higher to 6.2% in 2023 and unchanged at 4.2% in 2024. In 2024 and 2025 we expect headline inflation of 4.5%,” he said.
South Africa Growth
GDP growth projections were cut to 1.8% in 2022 (vs 1.9%), 1.1% in 2023 (vs 1.4%) and 1.4% in 2024 (vs 1.7%), mainly due to rolling blackouts.
The SARB concluded in their monetary policy statement that; “Economic and financial conditions are expected to remain more volatile for the foreseeable future. In this uncertain environment, monetary policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook. The MPC will seek to look through temporary price shocks and focus on potential second round effects and the risks of de-anchoring inflation expectations. The Bank will continue to closely monitor funding markets for stress.”
From The Traders Community Research Desk