The South African Reserve Bank’s Monetary Policy Committee (MPC) has decided to keep the repo rate unchanged at 3.5% per annum. The decision follows largely unchanged inflation expectations and even with continued upside risks, the committee expects inflation to stay close to the mid-point over the forecast period.
Please see below highlights from the note prepared by the Momentum Macro Research Team.
The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) held interest rates steady at 3.5% at the September 2021 interest rate-setting meeting. The MPC’s decision on interest rates was in line with all 20 of the surveyed analysts in the September 2021 Reuters Econometer poll. In the run-up to the meeting, the forward-rate agreement (FRA) market concurred with the view of stable interest rates at the September meeting.
The SARB’s growth forecast for the local economy rose to 5.3% from 4.2% (July 2021 prediction) for 2021. Growth is expected to register at a lower 1.7% in 2022 (previously 2.3%) and 1.8% in 2023 (previously 2.4%). The size of the forecasted negative output gap was revised to a smaller 2% for 2021 (previously 3.2%) and is expected to narrow to negative 0.2% in 2023, from a previous forecast of negative 0.4%. The SARB views risks to its growth projections as evenly balanced.
The SARB nudged its headline inflation forecast higher to 4.4% for 2021 (previously 4.3%) and maintained its 2022 projection at 4.2%. The SARB continues to view risks to the inflation trajectory to the upside in the longer term, given the upside threat of administered prices (including electricity tariffs), higher domestic import tariffs and escalating wage demands.
The five MPC members’ preferences for the interest rate decision remained unchanged for the fourth consecutive meeting.
Although the inflation outlook suggests no immediate pressure to hike interest rates imminently, a more rapidly closing output gap, still negative real interest rates and inflation risks skewed to the upside substantiate the need for a steady normalisation in interest rates. We expect the first interest rate hike to occur in the first quarter of 2022, with risks biased to an earlier move in November 2021. The pace of interest rate increases is likely to be gradual thereafter with another two hikes of 25 basis points each pencilled in for 2022 and up to three hikes of 25 basis points each for 2023.
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