South African Reserve Bank hikes rates

 ·27 Jan 2022

The South African Reserve Bank’s Monetary Policy Committee (MPC) has decided to raise the repo rate to 4% per annum.

Four members of the Committee preferred an increase and one member preferred an unchanged stance, Reserve Bank governor Lesetja Kganyago said in a statement on Thursday afternoon (27 January), adding that the rate hike comes against a backdrop of higher global and local inflation.

“The implied policy rate path of the Quarterly Projection Model (QPM) indicates gradual normalisation in the first quarter of 2022, and into 2023 and 2024, given the inflation forecast. As usual, the repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks,” he said.

Given the expected trajectory for headline inflation and upside risks, the MPC believes a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates, Kganyago said.

However, economic and financial conditions are expected to remain more volatile for the foreseeable future, he said.

“In this uncertain environment, 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.

“Current repurchase rate levels reflect an accommodative policy stance through the forecast period, keeping financial conditions supportive of credit demand as the economy continues to recover.”

Better anchored expectations of future inflation should keep interest rates lower for longer, and can be realised by achieving a prudent public debt level, increasing the supply of energy, moderating administered price inflation and keeping wage growth in line with productivity gains, the governor said.

“Such steps will enhance the effectiveness of monetary policy and its transmission to the broader economy.”

GDP and inflation

GDP is expected to grow by 1.7% in 2022. The deceleration in growth from 2021 to 2022 is primarily a result of the fading rebound from the pandemic, alongside a climbdown from high export prices. GDP growth is forecast to be 1.8% in 2023 and 2.0% in 2024, Kganyago said.

“The risks to the inflation outlook are assessed to the upside. Global producer price and food price inflation continued to surprise higher in recent months and could do so again. Oil prices increased strongly through 2021 and are up sharply year to date.

“Current oil prices sit well above forecasted levels for this year. Electricity and other administered prices continue to present short- and medium-term risks.

Given the moderate medium and long-term inflation projections set out above, higher domestic import tariffs, stronger services inflation, and higher wage demands present additional upside risks to the inflation forecast, Kganyago said.

A particular risk arises from the possibility of a faster normalisation of global policy rates than is currently built into the forecast, which assumes some rate hikes to begin around June of 2022, he said.

“Added to this is the risk that quantitative tightening will occur more quickly than previously expected, leading to stronger capital flow reversals from riskier assets such as emerging market debt.”

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