South Africa Reserve Bank is expected to aggressively hike interest rates when its monetary policy committee meets this week.
After raising the cost of borrowing by 25 basis points at each of its last three meetings to 4.25%, the top monetary policy organ is expected to up the pace of tightening at this meet.
South Africa has been faced with inflationary pressure, triggered by a weakening rand. The hawkish stance by monetary authorities in Europe and the USA has also lowered the appeal for local assets to offshore investors, as concerns about growth prospects of the domestic economy play in the background.
South Africa’s inflation rate has held steady near the Reserve Bank’s target range ceiling. But analysts expect the MPC to undertake the steepest interest rate hike in six years.
According to statistics in South Africa, annual inflation stood at 5.9% in April, unchanged from the prior month.
South Africa Reserve Bank Monetary Targets
South African Reserve Bank officially targets inflation in a band of 3% to 6%, while its monetary policy committee prefers to anchor expectations close to the midpoint of the range.
The rate of price growth, stroked by record-high fuel prices and rising food costs, has topped 4.5% for an entire year, with the breach of the ceiling of the official target now creating room for an aggressive rate hike at this Thursday’s MPC meeting.
Of the 20 economists in a Bloomberg survey, 15 predict a half-percentage point increase, with the remainder expecting a smaller 25 basis-point hike.
Forward-rate agreements starting in one month, used to speculate on borrowing costs, are fully pricing in a quarter-point increase and have put the odds of a 50 basis-point move at almost 90%.
The implied policy rate path of the central bank’s quarterly projection model, which the MPC uses as a guide, last indicated a repurchase rate of 5.06% by year-end.
At the time, the Reserve Bank saw the economy growing by 2% in 2022 – a forecast likely to be revised lower after deadly floods wreaked havoc in the KwaZulu-Natal province – the second-largest contributor to the nation’s gross domestic product – and the resumption of rolling power blackouts.
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