It's hopeful to predict that the SA Reserve Bank went out with a bang, exiting this rate hike cycle with a final big 50 basis point hike. This may be the consensus expectation too, but as the monetary policy committee demonstrated on Thursday: it doesn't care about your consensus expectation. Not one of the 20 economists who took part in a Reuters survey expected a 50-basis point hike. Given that the Fed only hiked its key rate by 25 basis points last week, the local bank was supposed to follow with a similar increase. Some economists expected no hike at all. But the bank is clearly worried about inflation, and sharply increased its expected headline inflation forecast for the year from 5.4% to 6% on Thursday. February's inflation shock, which saw food inflation (13.6%) hit the highest rate since 2009, helped to turn the monetary policy committee more hawkish. The weak rand, which lost 22% of its value in the year to February and is one of the worstperforming currencies this year, is also fuelling inflation. "South Africa is a price taker for food, running on import or export parity pricing, with global commodities (including agricultural food) priced in US dollars, so the rand's hefty depreciation against the dollar over the past year to February has mattered," says Investec economist Annabel Bishop. The rand benefits from higher interest rates, which attract foreign inflows in search of yield. The local currency rocketed in reaction to the bigger-than-expected rate hike. It burst through the R18/$ level and was trading around R17.80/$ for the first time in weeks. "This maybe 'it' and South Africans will be in a holding pattern for the rest of the year, but there is a lot of uncertainty at the moment, so I would not rule out another 25-basis point hike this year," said Angelika Goliger, chief economist of EY Africa. Most other economists expect that rates should stay at these levels, barring further shocks. "Our base case is that if the rand is well behaved, inflation expectations stabilise or fall, and the Fed is near completion [of its interest rate hike cycle], then the SARB will be able to keep the repo rate steady at 7.75% for the time being," said Carmen Nel, economist and macro strategist at Matrix Fund Managers.

"However, we should consider the alternative scenario of renewed rand weakness, a higher terminal US policy rate, and sticky domestic inflation. Should these materialise, then the SARB will clearly not hesitate to hike rates again. There are clearly many 'ifs, buts and maybes' that the market will have to digest in the coming days." The latest large increase rate will heap more pain on an economy which may already be in a recession. The MPC lowered its forecast for 2023 economic this year from a grim 0.3% to an even grimmer 0.2%. But it boosted its growth forecast for next year and 2025 to 1.0% and 1.1% respectively (from 0.7% and 1.0% previously). The MPC says that private sector investment is expected to remain positive, in large part because companies are investing in renewable energy to overcome load shedding. Credit extension to corporates also remains relatively strong, remarked Reserve Bank deputy governor Kuben Naidoo. Higher interest rates make large banks more profitable, and more profitable banks are more likely to support the economy with lending, he said. Wasserman, H. (March 30, 2023). Rate shocker: Did the MPC just go out with a bang? News24.com. https://www.news24.com/fin24/economy/rate-shocker-did-the-mpc-just-goout-with-a-bang-20230330 (Retrieved April 3, 2023).

In an essay three pages, critically discuss the role of monetary policy in an inflationary environment such as the one South Africa is in. Pay attention to the tools at the disposal of government, and to the effect that such decisions will have in the short-, medium- and long term, from both a micro- and macroeconomic perspective. Consider the effect that such a decision will have on the country's balance of trade and engagement in the international market.

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Answer The Role of Monetary Policy in an Inflationary Environment A Critical Analysis of South Africas Case Monetary policy plays a crucial role in managing inflationary pressures and maintaining macr... View the full answer