South Africa’s central bank surprised markets by raising its main lending rate by 50 basis points to 7.75% on Thursday, exceeding expectations.
The rate hike was twice as large as the 25 basis point increase predicted by the majority of economists polled by Reuters. It sparked a surge in the rand, which extended previous gains to gain nearly 2% against the dollar.
The South African Reserve Bank has now raised rates for the ninth time in a row, adding a total of 425 bps to the repo rate since it began tightening policy in November 2021.
February consumer inflation in South Africa edged up to 7.0% year on year from 6.9% in January, data showed last week, signalling that rolling power cuts nationwide may be stoking price pressures.
The central bank targets inflation between 3% and 6%.
The five-member Monetary Policy Committee was split 3-2 in its decision, with 3 members preferring a 50 bps increase and 2 wanting a 25 bps rate increase.
Central bank governor Lesetja Kganyago said risks to the inflation outlook were assessed on the upside.
“Despite some easing of producer price and food inflation, global price levels remain elevated,” he told a media conference.
“Electricity prices and other administered prices continue to present clear short and medium-term risks.”
Kganyago said the rise in South Africa’s headline inflation rate has been shaped primarily by fuel, electricity and food price inflation.
With core goods and food higher in the near term, headline inflation for 2023 was revised significantly higher to 6.0%, up from 5.4%, he said.
Despite this, food and fuel inflation are expected to ease, resulting in a headline forecast of 4.9% for 2024 and 4.5% in 2025, he said.
He said economic growth “has been volatile for some time and prospects for growth appear even more uncertain than normal”.
Market analysts said they were caught by surprise.
“The South African Reserve Bank surprised markets,” Razia Khan, London-based managing director and chief economist for Africa and Middle East at Standard Chartered said.
Shaun Murison, senior market analyst at IG in Gauteng, South Africa, said “a revised (higher) outlook towards food and core goods inflation has seen the SARB moving decidedly more hawkishly than markets had expected”.
South Africa based FNB Chief Economist, Mamello Matikinca-Ngwenya said “ahead of this decision, the consensus view was that today’s move would mark the end of the hiking cycle, but the road ahead is precarious”.