The Monetary Policy Committee (MPC) unanimously decided to increase the policy rate by 25 basis points to 7.25%, effective 25 September.
South African Reserve Bank (SARB) Governor Lesetja Kganyago announced the decision, saying that the inflation outlook faced upside risks, with inflation at 4.4%.
“Based on the latest survey from the Bureau for Economic Research, expectations have eased slightly, after rising in the previous quarter. That said, they remain high, with longer-run expectations around 4% rather than our 3% target.
“A few months back, it seemed that the fuel-price shock might be unwinding, but now it has intensified. We are also seeing global rates moving higher,” the Governor said.
He said the MPC had adopted a measured approach to setting rates amid heightened uncertainty while remaining focused on its price-stability mandate.
“It is crucial that inflation reverts to 3% as the current shock fades, and we take responsibility for delivering that outcome.
“The forecast from our Quarterly Projection Model (QPM) has the policy rate broadly stable through the remainder of this year. The model shows cuts later in the forecast, as inflation falls to 3% and the QPM moves to a more neutral policy stance.
“As before, this rate path remains a broad policy guide. Our decisions will continue to be taken on a meeting-by-meeting basis, with careful attention to the outlook, data outcomes, and the balance of risks to the forecast,” Kganyago emphasised.
He highlighted the challenging and uncertain global environment.
“Global supply chains are being disrupted by intensifying conflict in the Middle East, as well as the Russia-Ukraine war. This adds to inflationary pressures. In this context, central banks in major economies are raising rates,” the Governor said.
Inflation is expected to remain elevated through 2027, driven largely by fuel and services inflation.
“We currently project that inflation will return to the 3% target towards the end of 2027. The global shocks continue to hurt the South African economy. Despite a contraction in the second quarter, we expect a rebound in the second half of the year. Annual growth is now projected at 1.2%, revised down from 1.4%,” Kganyago said.
He noted that fuel prices had begun rising again after moderating between June and August, while services inflation remained elevated.
“By contrast, food inflation is at its lowest level since 2010. This reflects strong harvests and more stable meat prices following the foot-and-mouth outbreak. The rand has stayed resilient, helping contain import prices,” Kganyago said.
At this meeting, the MPC considered a scenario involving higher global interest rates.
“Our baseline forecast has the major central banks raising rates by about half a percentage point, between this year and next. Our scenario doubled that, taking the increase to a full percentage point. This causes rand depreciation, which lifts inflation. The model responds with a tighter policy stance, with rates about one hike above the baseline path and slower cuts subsequently,” the Governor said.
The MPC also considered a scenario involving higher inflation expectations and wage increases.
This scenario also pointed to a tighter policy stance, with the policy rate rising by the equivalent of one to two additional hikes above the baseline peak and remaining higher for longer.
“Overall, this is proving to be a difficult year for the global economy, and for South Africa. Geopolitical conflicts have caused severe negative supply shocks, which weaken output and raise inflation. South Africa’s growth recovery has slowed, while inflation has increased well above our target.
“Our approach is to look through the initial effects of price shocks, while ensuring that they do not entrench higher inflation. Unfortunately, large and sustained shocks, like those we are experiencing now, are more likely to trigger second-round effects, where individual price changes evolve into widespread increases. To prevent this, we are adopting a more restrictive monetary policy, with rates above longer-term levels,” Kganyago said.
He stressed that the MPC’s primary role is to protect the currency’s value by bringing inflation back to 3% over time. —SAnews.gov.za
