The SA Reserve Bank’s monetary policy committee (MPC) raised rates by 25 basis points to 3.75% on Thursday in a closely watched move that kept markets players guessing in the run up to the announcement.
The decision — with three MPC members voting for an increase and two for rates to be kept on hold — signals the start of a slow turnaround from ultra accommodative monetary policy that was implemented under the onslaught of the Covid-19 pandemic.
Policy rates have been at a five-decade low of 3.5% since last July, in a bid to support businesses and households through one of the worst economic recessions in memory, that saw SA’s economy contract 6.4% during 2020 and pushed joblessness to a record high of 34.4%.
Though SA has begun its economic recovery, assisted by a global surge in commodities that boosted state coffers and the profits of SA’s mining sector, July’s civil unrest and more recently power cuts from embattled power utility Eskom have cast a pall on this rebound.
For this year and the next two years, headline consumer price inflation was revised slightly higher, to 4.5% for 2021 (from 4.4%), to 4.3% next year (from 4.2%), and to 4.6% in 2023 (from 4.5%). Headline CPI for 2024 is expected to be 4.5%.
The Bank expects the economy to grow by 5.2% this year (from 5.3%), revised down due to the larger negative effect on output than was previously estimated from the July unrest and other factors.
GDP is expected to grow by 1.7% in 2022 and by 1.8% in 2023, unchanged from the September forecast. GDP growth in 2024 is forecast to be 2%.
Thursday’s decision was a close call with a range of contesting factors at play that left analysts fairly split on what direction the committee would take. Ahead of the announcement the median forecast of 21 economists surveyed by Bloomberg suggested the Bank would hike by 25 basis points to 3.75% with 11 expecting a cut and 10 predicting it would hold.
Along with cutting rates the Bank took a number of additional step to help smooth the functioning of financial markets and stimulate lending through the crisis, including buying government bonds in the secondary market and easing regulatory requirements on Banks.
Prior to the decision the rand was down about 1% to the dollar, weakening a little further after the announcement. At 3.38pm it had fallen 1.38% to R15.6947/$, after briefly hitting as low as R15.76/$, its worst intraday level since early November 2020.
After being a little weaker before the decision bonds firmed with the benchmark R2030 government bond last yielding 9.42%, down four basis points. Bond yields move inversely to their prices.
