While a higher inflation rate may otherwise inspire increased hawkishness in the South African Reserve Bank’s monetary policy committee — which meets this week — analysts expect that the repo rate will be kept on hold again. (Delwyn Verasamy/M&G)
The South African Reserve Bank’s monetary policy committee (MPC) has kept the repo rate unchanged at 8.25%, meaning the prime lending rate — the interest rate charged by commercial banks — stays at 11.75%.
The decision was not unanimous as three of the five MPC members voted to keep interest rates unchanged while two voted to raise them by 25 basis points.
This comes after the 10 consecutive interest hikes implemented by the central bank since November 2021. At its previous meeting in May, the MPC lifted the repo rate by 50 basis points, putting monetary policy in economically restrictive territory.
Responding to a question on Thursday about whether interest rates have peaked, Reserve Bank governor Lesetja Kganyago said: “The answer is a resounding “no” and the answer to that depends on what happens to inflation.”
He said near-term prospects for the global economy are unchanged and, at the current repurchase rate level, policy is restrictive, consistent with elevated inflation expectations and the inflation outlook. Serious upside risks to the inflation outlook remain.
Ahead of Thursday’s decision, economists were divided on whether the MPC would increase interest rates by 0.25 percentage points or keep them steady.
Statistics South Africa data on Wednesday kept the decision up in the air, as it showed that consumer inflation had retreated back into the Reserve Bank’s 3% to 6% target band at 5.4% year-on-year in June. This was compared with 6.3% in May.
“The policy stance aims to anchor inflation expectations more firmly around the midpoint of the target band and to increase confidence of attaining the inflation target sustainably over time,” Kganyago said on Thursday.
“Guiding inflation back towards the midpoint of the target band reduces the economic costs of high inflation and will achieve lower interest rates in the future.”
He noted that the rand had weakened over the past year, depreciating by about 5% in the year to date against the US dollar, and showing high volatility in response to risk-on and risk-off episodes.
The MPC revised the local food price inflation forecast lower to 10.3% this week from 10.8% in the previous meeting for 2023. However, it revised its food inflation prediction for 2024 higher to 5.2% from 5%.
“Despite recent easing in some food price components, domestic food price inflation is still elevated at 11% in June and the risk of drier weather conditions in coming months has increased. In the absence of sustained and consistent increases in energy supply, electricity prices continue to present clear inflation risks,” Kganyago said.
The governor warned that load-shedding and logistics constraints could also have broader effects on the cost of doing business and the cost of living. Given uncertain fuel and food price inflation, considerable risk still attaches to the forecast for average salaries.
For 2023, the central bank’s forecast for South Africa’s GDP growth is slightly higher than in May, at a revised 0.4% from 0.3%. Energy and logistical constraints remain binding on the growth outlook, limiting economic activity and increasing costs.