Although the South African Reserve is officially targeting inflation in the 3% to 6% band, its monetary policy committee prefers to anchor expectations near the midpoint of the range. With record-high fuel prices (2.2% month-on-month and 29.2% higher than a year ago) and rising food costs, inflation is above 4.5% for a full year, with the official target ceiling now in aggressive rates on Thursday. Making room for growth.
After raising borrowing costs by 4.25% by 25 basis points in each of its last three meetings, the Monetary Policy Committee is expected to accelerate the tightening this week. The risk of inflation caused by a weaker RAND and more hockey positions by the US Federal Reserve and the European Central Bank reduces the appeal of local resources to offshore investors, overcoming concerns about the potential for deterioration in domestic economic growth.
In the Bloomberg survey, 15 out of 20 economists forecast a half-percentage point increase, while the rest expect a 25 basis-point increase. Forward-rate contracts, which begin within a month, are used to estimate the cost of borrowing, set the full price in a quarter-point increase, and keep the probability of a 50 basis-point move at about 90%.
The policy rate underlying the central bank’s quarterly projection model, which the MPC uses as a guideline, ultimately indicates a 5.06% repurchase rate at the end of the year. At the time, the Reserve Bank saw the economy grow 2% in 2022 – a forecast that could be less revised after the devastation in KwaZulu-Natal due to severe flooding – the country’s second-largest contributor to GDP – and the resumption of rolling power blackouts.
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