The bank slashed its main lending rate to a record low of 3.5% last year to cushion the impact of the COVID-19 pandemic and has left it on hold for the past seven meetings to support an economic recovery.
But a better-than-expected recovery in the first half of 2021 suggests "underlying price pressures may be stronger than initially thought," the South African Reserve Bank (SARB) said in its Monetary Policy Review.
"With inflation around the target midpoint and the output gap closing, the repo rate needs to adjust to its estimated neutral level over the medium term, to reduce the stimulus and keep inflation contained," it added. "Delaying the lift-off could see the monetary policy authorities playing catch-up with inflation, potentially destabilising the relatively well-anchored inflation expectations."
In keeping rates on hold for so long, the SARB has diverged from other emerging market central banks like those of Russia and Brazil which have tightened policy considerably this year.
Among risks to the medium-term inflation outlook, which it said had sharply increased, the SARB cited elevated producer prices, the persistence of supply constraints, and high food and oil prices.
The bank added that rebased gross domestic product data from the statistics agency showed that economic activity was largely back to the pre-pandemic level, although on a sectoral basis the recovery had been uneven.
(Reporting by Alexander Winning; Editing by Olivia Kumwenda-Mtambo, Editing by William Maclean)
