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SARB keeps rate on hold on well-anchored inflation expectations

The MPC unanimously decided to keep the policy rate unchanged at a historic low 3.5%, in line with expectations. Well anchored inflation expectations supported the decision.

The SARB revised its inflation forecast marginally higher to 4.4% in 2021 and maintained 4.2% in 2022 and 4.5% in 2023. Also, core inflation is revised marginally higher in 2021 and 2022 and unchanged at 4.3% in 2023. The committee assesses the short-term risk to the forecast to be on the upside. In the long term, the upside risk to the inflation forecast emanates from high wage demand, high import tariffs, and a weak bias exchange rate. Importantly, inflation expectations surveyed by the BER remained well anchored below the mid-point, keeping the committee somewhat relaxed.

The GDP forecast has been revised higher to 5.3% in 2021 (previous 4.2%) following rebasing and benchmarking exercise, which uncovered that the economy is 11.0% higher than previously thought. The economy would grow firmly even though the July impact is higher than the previous estimate. However, the economy is marked down to 1.7% and 1.8% in 2022 and 2023, respectively because lower investment to GDP constrains potential growth.

The quarterly projection Model (QMP), an important monetary policy input, produced one rate hike at the end of 2021 and four increases in each quarter of next year. However, the statement noted that the policy will still remain accommodative. The MPC can be expected to start normalizing the policy rate potentially before year-end or early next year.

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