SARB MPC holds rates, keeps an eye on geopolitical tensions

The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) held rates at 6.75%, central bank governor Lesetja Kganyago announced on Thursday afternoon.

Kganyago was making the second repo rate announcement for the year. The announcement follows the inflation print cooling to the new official inflation target of 3% in February.

“Against this backdrop, the MPC decided to keep the policy rate unchanged at 6.75%. The decision was unanimous. In previous meetings, we warned of elevated risks, and we have been proceeding cautiously in our rate setting. Now a crisis has hit. This prudent approach is proving appropriate.”

However, Kganyago warned that the war between the US, alongside Israel, and Iran presented some uncertainty as well as potential supply-side shocks. He said inflation was 3.0% for February, with core inflation also at 3.0%, precisely in line with the MPC’s target.

“Higher energy prices will raise inflation in the near term. We expect headline inflation to soon accelerate to around 4%, with fuel inflation over 18% for the second quarter. Our baseline forecast then has a gradual unwinding of the shock, taking inflation back to 3% late next year.”

He said the ongoing Middle East conflict is a clear instance of a supply shock, which raises prices while weakening demand.

“The standard response to a supply shock is to look through first-round effects, which are unavoidable and cannot be stopped by interest rate changes.

“At the same time, central banks should be alert to second-round effects, where an initial shock triggers broad price increases. Getting policy right means ensuring that the price response to supply shocks is transitory, and not persistent.”

He said the latest survey showed all respondents had moderated expectations below the official target, but this survey was taken before the war. Inflation is still projected to settle at 3% over the next two years.

“For expectations, the latest survey once again showed all respondents lowering their projections, closer to our target — but this survey was in the field before the war started. Market-based indicators of inflation expectations have picked up recently, but they tend to be volatile.”

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