Against widespread expectations of a 0.25% hike in the repo rate, the SARB delivered a surprise 0.50% increase in interest rates.
This moves the repo rate from 7.25% to 7.75% and the Prime rate from 10.75% to 11.25%.
The SARB, and central bankers at large, find themselves in the precarious position where they have to manage both financial and price stability.
Recent bank failures threaten financial stability while inflation has continued to put price stability at risk.
The market had run ahead of central banks, predicting that central banks would have to decrease interest rates in response to the recent bank crisis. This expectation was not to be, with the US Fed and the Bank of England hiking by 0.25%, and with the ECB and the SARB hiking by 0.50%.
The SARB believes that it is difficult to say whether we have reached the top of the cycle. There still exists significant volatility in global markets which may continue to put upward pressure on interest rates.
When deciding on the direction of interest rates the SARB considers both global and local dynamics. Furthermore, South Africa relies on global financing and needs to create an attractive environment for this financing.
Where South Africa is unable to raise such funding, prices (interest rates) must be adjusted to make South Africa an attractive investment destination.
Given that our peers have much higher policy interest rates (e.g. Brazil at 13.65% and Mexico 11.00%), the global interest rate environment is, and continues to be, extremely competitive.