The South African Reserve Bank (SARB) sets the repo rate based on a number of economic factors. The process typically involves the following steps:
Analysis of economic conditions: SARB continually monitors economic indicators such as inflation, GDP growth, employment, and other relevant data. This analysis informs their understanding of the current state of the economy.
Forecasting and modeling: Using economic models like the Quarterly Projection Model (QPM), SARB forecasts future economic conditions, including future inflation rates.
Meeting of the Monetary Policy Committee (MPC): The MPC, which is made up of senior officials from the SARB, meets regularly (usually every two months) to discuss economic conditions and forecasts. During these meetings, they decide whether to adjust the repo rate.
Decision-making: If the MPC believes that inflation is likely to rise above the target range (3-6% as of my knowledge cutoff in September 2021), they may decide to increase the repo rate to cool down the economy and prevent excessive inflation. Conversely, if they believe the economy is slowing down too much and inflation is too low, they may decide to lower the repo rate to stimulate economic activity.
Communication: Once a decision is made, the SARB announces the new repo rate to the public, along with an explanation of the economic conditions and reasoning that led to the decision.