The Sarb's decision to hold the repo rate at 7% sparked a sell off in the rand and bonds, but economists say the central bank remains focused on achieving its long term inflation objective.
Financial markets were caught off guard by the Monetary Policy Committee's decision, with the rand weakening sharply against the US dollar and government bond yields rising immediately after the announcement.
According to Nedbank Group Economic Unit, markets had widely anticipated a 25 basis point interest rate increase following June's higher than expected inflation reading and escalating geopolitical tensions in the Middle East.
"In an unexpected move, the Sarb held rates at 7% at the previous MPC meeting. The markets were caught completely by surprise and reacted badly to the decision, with the rand depreciating by 2.7% against the US dollar and South Africa's benchmark 10 year government bond yield rising by 24 basis points to 8.93% in the immediate aftermath of the meeting," Nedbank said.
The central bank noted that investor disappointment stemmed from several factors, including June's consumer inflation rate rising to 5%, stronger evidence of indirect inflationary pressures, higher global oil prices following renewed conflict between the United States and Iran, and expectations that the Reserve Bank would adopt a more hawkish stance as it pursued its new inflation target.
