The central bank of South Africa has raised its main interest rate to a 14-year high in an effort to curb inflation. Governor Lesetja Kganyago described the move as “bitter medicine” necessary to address the inflationary pressures.
The bank increased rates by 50 basis points to 8.25% after revising its inflation forecasts for this year and the next, stating that risks were tilted to the upside.
The decision was unanimously agreed upon by the members of the Monetary Policy Committee, following a 50 basis points hike in the previous policy meeting held by the South African Reserve Bank in March. This marks the 10th consecutive rate hike by the SARB, totalling 475 basis points since the tightening cycle began in November 2021.
In its statement, the bank noted that the policy rate has now entered “restrictive” territory. Previously, the bank had described its policy as accommodative or supportive of the economy.
During a news conference, Governor Kganyago emphasized that “the economy is suffering from inflation.”
“The medication might be bitter, but if the patient does not take the medication, they will end up in surgery and in intensive care,” he added.
The magnitude of the rate increase was larger than the 25 basis points anticipated by the majority of economists in a recent Reuters poll. However, it was broadly in line with market expectations.
Following the announcement, the South African rand reached a new all-time low against the US dollar, declining approximately 2% on the day. One analyst mentioned that some traders had speculated on a larger 75 basis points rate hike.
The central bank of Africa's most industrialized economy aims to bring inflation back within its target range of 3% to 6%.
Although inflation unexpectedly dropped to 6.8% year on year in April from 7.1% in March, the bank's updated forecasts indicate that it now expects inflation to average 6.2% in 2023, up from the previous projection of 6.0%.
“With core goods and food higher in the near term, headline inflation for 2023 is revised up,” stated the SARB in a released statement.
The bank also highlighted the likelihood of further currency weakness due to the presence of upside inflation risks, increased domestic and external financing needs, and power outages (known as load-shedding).
According to the bank's revised forecasts, inflation is predicted to only sustainably return to the mid-point of the target range by the second quarter of 2025, compared to the fourth quarter of 2024 as projected in its previous March meeting.
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