The South African Reserve Bank held its benchmark interest rate at 7% on Thursday, a choice that ran counter to the expectations of most economists. Analysts had largely anticipated a 25 basis point increase, but the Monetary Policy Committee (MPC) judged that its current policy stance remained appropriate following the rate rise at its prior meeting in May.
Within the committee, the decision was not unanimous. Four members voted to keep the policy rate unchanged, while two members supported raising the rate by 25 basis points.
Sentiment among economists had shifted toward a hike after recent geopolitical tensions between Iran and the United States contributed to upward pressure on global oil prices. A Reuters survey found that most economists in that sample expected a 25 basis point increase ahead of the MPC meeting.
Markets reacted to the central bank's announcement. The South African rand weakened after the decision was made public.
Inflation remains above the central bank's stated target. The Reserve Bank seeks to keep inflation at 3%, with a tolerance range of one percentage point on either side. Annual consumer inflation rose to 5.0% in June, up from 4.5% in May.
The MPC's explanation for maintaining its stance highlighted that the committee considered the policy setting appropriate in the present circumstances after the May increase. Beyond the vote split and the statement on policy appropriateness, the committee's commentary did not add new numerical guidance in the announcement.
Observers taking in the full set of facts - the split vote, higher-than-target inflation in June, prior tightening in May, and the market response - will note that the central bank chose to pause rather than immediately follow the majority forecast for a further hike. The rand's movement following the decision underscores how financial markets registered the divergence between expectations and the MPC's chosen path.
Takeaway: The Reserve Bank has paused at a 7% policy rate despite rising inflation and economist expectations for a 25 basis point tightening, with a 4-2 vote in favor of keeping rates unchanged and a subsequent weakening of the rand.