The South African Reserve Bank keeps interest rates unchanged despite mounting inflationary pressures

SOUTH AFRICA - Report 21 May 2021 by Iraj Abedian

The South African Reserve Bank (SARB) has once again announced that it is keeping the benchmark interest rate unchanged following this week’s conclusion of its Monetary Policy Committee’s (MPC) third meeting of the year. The repo rate remains at 3.5% and the prime lending rate at 7%. The decision is also in line with expectations of majority of surveyed economists, including the Reuters’ economists survey consensus. It was reached following a unanimous vote by the MPC members.

We are of the view that if the Reserve Bank had any intentions of cutting interest rates further to aid the ailing economy, it would have done so already, especially before the expected uptick in the inflation rate on account of base effects. The latest consumer inflation figures available are those of April 2021 released by Statistics South Africa (Stats SA) on Wednesday, and they place the inflation rate at 4.4% y/y, a significant increase from the 3.2% y/y registered in March. The rebound in international oil prices has resulted in the surge in fuel price inflation from 2.3% y/y in March to 21.3% y/y in April, leading to the marked acceleration in transport inflation from 3.8% y/y in March to 10.6% y/y in April. The trend in the much-elevated consumer inflation should continue into the coming months due to the base effect, more especially so up to June 2021, as the corresponding periods during 2020 saw the most dramatic declines in fuel inflation (see Graph 2). The other notable upside risk to the inflation rate stems from rising electricity prices as Eskom increases tariffs. As such, we do not foresee any more interest rate cuts in the current year, with a higher probability of a more hawkish MPC in the coming months.

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