South Africa’s central bank has unveiled the biggest increase in interest rates for nearly 20 years in the continent’s most industrial economy, joining the wave of policymakers trying to tackle surging global inflation.
The South African Reserve Bank raised its main benchmark rate by three-quarters of a percentage point on Thursday to 5.50 per cent. This was more than expected as the bank warned that aftershocks from the war on Ukraine would be felt in food and fuel prices throughout the year.
South African inflation, which was driven by food and fuel prices to a 13-year high of 7.4 per cent in June, is likely to remain above a 3 to 6 per cent target band until the second quarter of next year, the bank said.
Economists had mostly expected the bank to raise rates by half a percentage point, but this was favoured by only one of five monetary policy committee members. One member favoured a full percentage point increase.
“The aim of the policy is to stabilise inflation expectations more firmly around the midpoint of the target band and to increase the confidence of hitting the inflation target in 2024. The bank’s forecast for inflation this year is 6.5 per cent. “Russia’s war in Ukraine is likely to persist for the rest of this year and may have significant further effects on global prices,” the bank said.
South Africa last raised rates by more than half a percentage point in late 2002. Like their emerging-market peers, South African monetary policymakers are under pressure to stay ahead of the US Federal Reserve, which has raised rates by the most since 1994.
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The South African rand has fallen by about 6 per cent against the US dollar so far this year. South African rates remain below their level just before the coronavirus pandemic struck in early 2020, but economists now expect the central bank to raise rates to about 6.5 per cent by the end of 2022.
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