Reserve Bank lifts repo rate to 7.25% as fuel shock intensifies

The Reserve Bank’s Monetary Policy Committee has raised the repo rate by 25 basis points to 7.25%, effective 25 September, in a unanimous decision announced by Governor Lesetja Kganyago.

The increase takes the policy rate to its highest level in this cycle at a moment when inflation sits at 4.4%, well above the 3% midpoint the committee is mandated to target. Kganyago said the inflation outlook faced upside risks, and that the MPC had adopted a measured approach amid heightened uncertainty while remaining focused on price stability.

“It is crucial that inflation reverts to 3% as the current shock fades, and we take responsibility for delivering that outcome,” he said.

The Governor pointed to a fuel-price shock that had appeared to be unwinding a few months ago but has since intensified, alongside global rates moving higher. He said global supply chains were being disrupted by intensifying conflict in the Middle East and the Russia-Ukraine war, adding to inflationary pressures, and that central banks in major economies are raising rates in response.

The decision lands on households already carrying debt at elevated rates. It raises the cost of servicing variable-rate credit, including home loans and vehicle finance, and it feeds through to new borrowing. The committee did not announce any accompanying relief measures, and the document summarising the decision does not state how the increase is expected to affect household budgets.

Kganyago said the Bank’s Quarterly Projection Model has the policy rate broadly stable through the remainder of this year, with cuts later in the forecast as inflation falls to 3% and the model moves to a more neutral stance. He described that rate path as a broad policy guide rather than a commitment, and said decisions would continue to be taken on a meeting-by-meeting basis with attention to the outlook, data outcomes and the balance of risks.

Inflation is expected to remain elevated through 2027, driven largely by fuel and services inflation, with a return to the 3% target projected towards the end of that year. Kganyago said fuel prices had begun rising again after moderating between June and August, while services inflation remained elevated. Food inflation, by contrast, is at its lowest level since 2010, which he attributed to strong harvests and more stable meat prices following the foot-and-mouth outbreak. The rand has stayed resilient, he said, helping to contain import prices.

The Bank has cut its growth projection for the year to 1.2% from 1.4%. Kganyago said that despite a contraction in the second quarter, a rebound is expected in the second half of the year.

The committee considered two alternative scenarios at this meeting. In the first, major central banks raise rates by about a full percentage point between this year and next, double the half-point increase in the baseline forecast. That causes rand depreciation, which lifts inflation, and the model responds with a tighter policy stance, with rates about one hike above the baseline path and slower cuts afterwards. In the second scenario, higher inflation expectations and wage increases also point to a tighter stance, with the policy rate rising by the equivalent of one to two additional hikes above the baseline peak and remaining higher for longer.

Kganyago said the Bank’s approach is to look through the initial effects of price shocks while ensuring they do not entrench higher inflation, and that large and sustained shocks are more likely to trigger second-round effects in which individual price changes evolve into widespread increases. He stressed that the MPC’s primary role is to protect the currency’s value by bringing inflation back to 3% over time.

This report is based on the official summary of the MPC’s decision published by SAnews, the South African Government News Agency, rather than the full statement of the Monetary Policy Committee.

Source: SAnews (South African Government News Agency), MPC raises repo rate to 7.25%