The repo rate will increase by 25 basis points to 3.75%, South African Reserve Bank (Sarb) governor Lesetja Kganyago announced on Thursday.

This means that the prime lending rate of commercial banks will increase to 7.25%.

The move to hike the rate comes amid increasing concerns around higher inflation and follows the conclusion of the Sarb’s last Monetary Policy Committee (MPC) meeting of the year.

It was arguably the most anticipated repo rate decision of the year, with economists and market watchers split on whether the Sarb would hold or increase the repo rate ahead of the decision.

The MPC decided to increase the repurchase rate by 25 basis points to 3.75% pic.twitter.com/Naxzyhei29

— SA Reserve Bank (@SAReserveBank) November 18, 2021
 

Announcing the move, Kganyago said that the MPC vote was split 3:2, with three members in favour of a 25bps hike while two voted to keep the repo rate unchanged.

He said the Sarb forecasts higher headline inflation for the fourth quarter of 2021, at 5.3% (up from the banks 5% forecast at its September meeting).
“For this year and the next two years, headline consumer price inflation is revised slightly higher, to 4.5% for 2021 (from 4.4%), to 4.3% next year (from 4.2%), and to 4.6% in 2023 (from 4.5%). Headline CPI for 2024 is expected to be 4.5%,” he added.

“The risks to the short-term inflation outlook are assessed to the upside. Global producer price and food price inflation continued to surprise higher in recent months and could do so again. Oil prices have increased sharply, with current prices well above our forecasted levels for this year,” said Kganyago.

“Electricity prices are higher throughout the forecast and with other administered prices continue to present short- and medium-term risks.”

“Given the moderate medium- and long-term inflation projections… a weaker currency, higher domestic import tariffs and escalating wage demands present additional upside risks to the inflation forecast,” the governor added.

Kganyago pointed out that with the expected trajectory for headline inflation and upside risks, the MPC believes a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates.

He warned economic and financial conditions were expected to remain “more volatile for the foreseeable future”.

“In this uncertain environment, policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook.”

Kganyago noted that while the domestic economy grew strongly in the first half of 2021, the second half of the year is expected to show mixed results.

“Overall, we forecast the economy to grow by 5.2% this year [compared to the 5.3% forecast in September], revised down due to the larger negative effect on output than was previously estimated from the July unrest and other factors.”
“Our revised estimate for third quarter economic growth is -2.5%, compared to the previous -1.2%. For the fourth quarter, we expect a GDP outcome of 2.6%, compared to the previous 1.6%,” he said.

“The July unrest, the Covid-19 pandemic and ongoing energy supply constraints are likely to have lasting effects on investor confidence and job creation, impeding recovery in labour-intensive sectors hardest hit by the lockdowns,” Kganyago added.

“High export prices are expected to fade, perhaps faster than previously expected,” he cautioned.

“Very weak job creation will moderate household consumption. Investment will remain constrained by the high risk of further load shedding and ongoing uncertainty,” he said, however he added that a faster vaccine rollout presents some upside risk to the growth outlook.