Repo rate stays put amid concerns over growth

Lesetja Kganyago noted the rising inflation trajectory. (Dean Hutton/Bloomberg)

Lesetja Kganyago noted the rising inflation trajectory. (Dean Hutton/Bloomberg)

The South African Reserve Bank left the repo rate unchanged at 6.5% on Thursday. However, governor Lesetja Kganyago warned of upward pressure on inflation and the challenging outlook for domestic growth.

The central bank reviewed its growth forecast for the year down to 1.2%, from 1.7% previously.

“The growth forecast has deteriorated, and the outlook remains constrained,” Kganyago said in a statement following a meeting of the bank’s monetary policy committee (MPC). He stressed that a firm commitment to credible structural policy initiatives and implementation is required to improve the country’s growth prospects.

There were, however, a number of “low-hanging fruit” that could be tackled to boost the economy, he said, including taking steps to improve tourism, speeding up the release of spectrum for mobile broadband, improving investor confidence and implementing the recommendations of the National Development Plan.

Kganyago noted the rising inflation trajectory.
Although it has remained within the bank’s target range of between 3% and 6%, it is moving closer to the upper end of the range, he said.

The continued strength of the United States dollar, which has appreciated against most currencies, as well as any sustained elevation of oil prices, escalating trade tensions and geopolitical developments continue to pose risks to the inflation outlook, Kganyago said.

“The rand will also remain sensitive to changes in global monetary policy settings and investor sentiment towards the emerging markets,” he added.

Kganyago noted that since the last MPC meeting, the Reserve Bank’s quarterly projection model now implied five interest rate increases, of 25 basis points, by the end of 2020, up from the four increases projected previously.

The decision to keep rates stable will come as a relief in the wake of growing public concern over rising fuel prices and a higher cost of living. This week, consumer price inflation data released by Statistic South Africa showed an increase from 4.4% in May to 4.6% in June.

The increase was driven by higher transport costs, according to PwC economist Christie Viljoen, with fuel being 16.3% more expensive year on year.

This has, however, been countered by lower food increases. Viljoen noted that food price inflation was at its lowest since 2013. Sugar, sweets and dessert prices, for example, shrank by 5.3%. This was because sugar inventories are rising due to slowing demand in many markets and rising production, especially in India, driving sugar prices lower, Viljoen said.

Fuel price increases are, however, expected to continue, on top of already record prices at the pump.

The Automobile Association estimated this week that fuel prices are likely to rise at the end of July and into August, based on current data.

Prices could rise by as much as 19c a litre for petrol, 13c for diesel and 22c for illuminating paraffin, the AA estimated.

Two weeks ago, President Cyril Ramaphosa, with the ministers in the economics cluster, discussed possible government interventions to address some of these concerns.

The ministers extended the mandate of the independent panel considering the zero rating of more products, to also consider fuel price issues. They also pleaded with companies across sectors to “be circumspect” about increasing their prices as a result of the fuel hikes, especially food manufacturers and retailers. 

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