Sarb hikes repo rate by 50bps

The South African Reserve Bank (Sarb) hiked the repo rate by 50 basis points (bps) on Thursday, the steepest increase since 2016.

Spiking global inflation fuelled the move, which takes the bank’s key rate to 4.75% and the prime lending rate of commercial banks to 8.25%.

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Sarb Governor Lesetja Kganyago announced the rate hike on Thursday, following the conclusion of the bank’s May Monetary Policy Committee (MPC) meeting. The hike was expected by a slight majority of economists ahead of the meeting, especially after the US hiked its key rate by the same margin last month.

He said four members of the MPC voted for a 50bps hike, while one member voted for an increase of 25bps.

The central bank’s forecast for headline inflation has been revised higher to 5.9% for 2022, due to higher fuel and food prices.

“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 may do so again,” said Kganyago.

“Russia’s war in the Ukraine is likely to persist for the rest of this year and may have significant further effects on global prices. Oil prices increased strongly from the start of the war and may rise more as stresses in energy markets intensify,” he warned.

#MPCMay22 The SARB’s MPC has decided to increase the repurchase rate by 50 basis points to 4.75% per year, with effect from the 20th of May 2022. pic.twitter.com/3EwPylORCH

— SA Reserve Bank (@SAReserveBank) May 19, 2022

Kganyago said the bank’s GPD forecast for 2022 has been revised down to 1.7%, from the 2% forecast cited in March following the last MPC meeting.

The governor listed short-term negative impacts of the KwaZulu-Natal floods in April and ongoing energy supply issues (load shedding) as contributing factors to the downward revision in the Sarb’s GDP forecast.

Meanwhile, Kganyago conceded that headline inflation is expected to breach the target range (Sarb’s 3% to 6%) in the second quarter of this year.

He noted that, in the near-term, headline inflation “has increased well above the mid-point of the
inflation target band”.

#MPCMay22 The Bank’s forecast of headline inflation for this year is revised higher to 5.9% (from 5.8%), primarily due to the higher food and fuel prices. pic.twitter.com/DSRYSRgEB6

— SA Reserve Bank (@SAReserveBank) May 19, 2022

“Against this backdrop, the MPC decided to increase the repurchase rate by 50bps to 4.75% per year, with effect from the 20 of May 2022,” he said.

“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,” Kganyago added.

Despite the 50bps hike, he reiterated that the implied policy rate path of the Sarb’s Quarterly Projection Model still indicates a “gradual normalisation” through to 2024 “given the inflation forecast”.