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The 50bp hike in the Reserve Bank’s repo rate to 6.75% per annum, effective from 29 January 2016, at the conclusion of its Monetary Policy Committee (MPC) meeting on 28 January 2016 is the first step needed to maintain macroeconomic stability.

Waning foreign capital inflows have been insufficient to cover the current account deficit, culminating in a weak rand. Although the feed-through effect from rand weakness into inflation has been modest in recent years, it would be a surprise if the rapid decline in the currency since October 2015 does not cause a marked increase in inflation. History suggests feed-through effects to inflation increase markedly when the currency falls sharply in a short space of time.

The palpably weak state of real economic activity gives pause for thought. However, in addition to the collapse in commodity prices, the root cause of South Africa’s poor GDP growth performance is to be found mainly in weak productivity levels and infrastructure constraints. When an economy’s supply side is not functioning efficiently, there is little the monetary authorities can do to lift growth.

Rather, the task at hand for the Bank is to contain inflation expectations and maintain a relatively stable, low inflation rate (between 3 and 6%) over the medium to long run.

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