MPC hikes the policy rate for the tenth consecutive time

By Patrick Buthelezi, economist at Sanlam Investments

The South African Reserve Bank (SARB)’s monetary policy committee (MPC) has continued its aggressive tightening approach, raising the policy rate by an additional 50 bps to bring the repo rate to 8.25%. This decision was unanimously supported by all committee members. The SARB has consistently increased the policy rate in the past ten monetary policy meetings, resulting in a cumulative hike of 475 bps since November 2021.

The current policy rate is at its highest level since 2009, as the bank remains committed to combating the persistently high cost of living. The SARB at least acknowledged that the monetary policy stance has become restrictive, which suggests it is probably very close to or at the top of the interest rate hiking cycle. The repo rate exceeds the QPM steady state policy rate of 7%. Monetary policy takes effect with long lags.

The SARB has revised its inflation forecast upwards to 6.2% in 2023 and 5.1% in 2024, while maintaining a projection of 4.5% for 2025. The upward revision reflects high food prices and a weak currency. The weak exchange rate and load shedding have prevented the pass-through of lower global food inflation to domestic food inflation. Average wage growth and unit labour costs are also expected to be higher in 2023 and 2024.

The SARB has made slight upward revisions, projecting 5.3% in 2023, 5% in 2024 and 4.6% in 2025. This aligns with the observation of persistent global core inflation. The SARB anticipates headline inflation will return within the target range in Q3 2023. However, the sustainable reversion to the midpoint of the target range is expected only by the second quarter of 2025. It is uncertain how quickly inflation will return to the target band.

The bank assesses the risk to the inflation outlook to be to the upside, owing to the weak exchange rate, the adverse impact of load shedding on supply and the cost of doing business, high administered prices and international oil prices. The recent depreciation of the currency is expected to contribute to inflationary pressures. Given that SA is a small open economy, the exchange rate plays a critical role. The bank’s response aims to prevent potential secondary effects and tries to re-anchor inflation expectations towards the midpoint of the target range.

The MPC has made a marginal upward revision to its near-term GDP growth forecast. It now projects 0.3% growth for 2023, aligning with global trends. However, the forecasts for GDP growth in 2024 and 2025 remain unchanged at 1% and 1.1%, respectively. The risk to the economic outlook is assessed to be balanced.

We expect that the MPC will maintain a restrictive monetary policy stance for longer and evaluate the impact of the cumulative interest rate hikes. However, the possibility of future interest rate hikes is not entirely ruled out and will depend on the inflation outlook. The currency will continue to be of critical importance. The SARB needs to be convinced that inflation and inflation expectations are firmly anchored towards the midpoint of the target range.