Policy rate raised to 7.0 percent by SARB
The South African Reserve Bank (SARB) has increased its policy rate by 25 basis points to 7.0 percent, effective May 29. The decision was driven by intensified inflation risks and the likelihood of second-round effects from overlapping shocks.
Inflation risks intensify
The Monetary Policy Committee of the South African Reserve Bank (SARB) decided to increase the policy rate by 25 basis points to 7.0 percent, effective May 29. Four members preferred this action, while two favoured no change.
The committee agreed that inflation risks had intensified, driven by a painful combination of higher global uncertainty and reduced disposable income.
Consumer prices rose 4.0 percent in April, up from 3.1 percent, primarily due to an 11.4 percent jump in fuel prices and services inflation accelerating to 4.6 percent.
Despite easing food inflation and a stronger exchange rate, the SARB noted upside risks to inflation, with headline inflation now forecast to average 4.4 percent this year and 3.7 percent next year, returning to target in 2028.
Global headwinds, domestic resilience
The global economic backdrop remains challenging, with fading hopes for a quick end to the Middle East crisis keeping oil prices around $100 per barrel.
This has prompted marked-down global growth forecasts and higher inflation projections, with major central banks now expected to increase rates this year.
Domestically, the SARB lowered its growth forecasts for the next two years, citing global uncertainty and reduced disposable income.
However, South Africa's recovery fundamentals remain intact, supported by a positive Moody's outlook, elevated terms of trade, and ongoing domestic reforms.
The Quarterly Projection Model indicates one hike this quarter, with rates easing later as inflation falls.
Navigating overlapping shocks
The SARB's rate hike is a pre-emptive strike against the risk of inflation becoming entrenched amidst large and overlapping global and domestic shocks.
While acknowledging the painful impact on growth, the committee prioritizes maintaining its credibility to guide inflation back to target.
This decision underscores the difficult balance central banks face in supporting economic activity while preventing further price surges.