Sarb raises rates for first time in 17 months

The South African Reserve Bank’s monetary policy committee voted by three to two to raise its policy rate by 25 basis points today (November 18).

The MPC cited “the expected trajectory for headline inflation and upside risk” as its reason for raising the rate to 3.75%. The two dissenting MPC members wanted to keep the rate unchanged.

The Sarb had maintained its policy rate at 3.5% since June 2020, after lowering it from 6.5% in a series of cuts starting last year.

The MPC consists of the governor, three deputy governors and the head of the economic research department. Lesetja Kganyago has been governor of the South African central bank since November 2014.

The MPC forecast that inflation would reach 5.3% in the last quarter of 2021, before falling modestly to 4.5% in 2022 and 4.3% in 2023. Although all these figures fall within its inflation target band (3% to 6%), these figures had also been revised upwards.

It also forecast an upward trend for core inflation, which it expects to be 3% this year and 3.7% next year, rising to 4.4% in 2023 and 4.5% in 2024.

The statement said South Africa faced several sources of inflationary pressure, including a weakening currency, higher electricity and oil prices, wage claims and tariffs.

The MPC expects a continued chain of rate increases. It forecasts an “increase of 25 basis points in the fourth quarter of 2021 and further increases in each quarter of 2022, 2023 and 2024”.

In September, Kganyago said he favoured a single inflation target of 3% or 4%, rather than the current band, which was adopted in 2001. Any change would require the finance ministry to agree.

The central bank said it estimates GDP contracted by 2.5% in the third quarter of 2021. Violent unrest erupted in July following the jailing of former president Jacob Zuma for contempt of court. Sarb said it expects the economy to grow modestly over the next three years, with 1.7% growth in 2022 rising gradually to 2% expansion in 2024.