/ 21 September 2023

Summer’s still not here: Reserve Bank holds restrictive repo rate

 Lesetjakganyago
Reserve Bank and governor Lesetja Kganyago

The South African Reserve Bank’s monetary policy committee (MPC) has again opted to keep the repo rate unchanged at 8.25%, marking the second consecutive pause in the central bank’s most aggressive hiking cycle in 15 years.

Of the five-member committee, two preferred raising the cost of borrowing by 25 basis points — indicating continued hawkishness from the Reserve Bank, as risks to the inflation outlook were assessed to the upside.

Reserve Bank governor Lesetja Kganyago said, though he was comfortable with the downward trend in inflation, he was less content with the pace. “It tells us that the job of tackling inflation is not yet done,” he said.

The governor repeated the analogy: “The arrival of one swallow does not mean that summer is here. You need to see more swallows in the sky, then you will know the summer is here.”

Inflation rose slightly to 4.8% year-on-year in August, from 4.7%, the lowest reading in two years.

But analysts expected the MPC to look past the temporary uptick in inflation and keep the repo rate unchanged, with many already predicting that borrowing costs have reached their peak.

This is as inflation looks to remain within the Reserve Bank’s 3% to 6% target range, despite it drifting slightly higher in the coming months.

Following Wednesday’s inflation print, Nedbank’s economists said they expect inflation to hover at about 5% over the last months of this year, averaging 5.9% in 2023. Nedbank forecasts that inflation will continue to be sticky at just above 5% during the first half of 2024, before stabilising close to 4.5%.

The MPC also forecasts headline inflation to average 5.9%, revising its expectation down slightly from the 6% predicted at the committee’s July meeting. 

The country’s headline inflation rate has been shaped primarily by food and fuel prices, the MPC noted. Compared to the previous meeting, fuel price inflation is significantly higher at 0.4% in 2023 (up from -3.1%), but the MPC’s food price inflation forecast  remains largely unchanged at 10.4%.

The MPC has assessed risks to the inflation outlook to the upside.

“At a global level, headline inflation continues to moderate, but food price inflation remains high, oil markets have tightened significantly and core inflation looks sticky,” its statement reads.

“Despite recent easing in some food price components, domestic food price inflation was still elevated at 8% in August and the risk of drier weather conditions in coming months has increased. We expect food price inflation to moderate further in the near term, but with high risk that it picks up later in 2024.”

The statement further noted the ongoing risk presented by load-shedding, noting that electricity constraints have broader effects on the cost of doing business and the cost of living.”

Meanwhile, the United States Federal Reserve also elected to hold its key policy rate this week. 

Economists also expect interest rates to plateau in the US, though the Fed has maintained a hawkish tone in an effort to quell inflation expectations. The 25 basis-point hike in July brought borrowing costs stateside to a 22-year high.

Despite South Africa’s interest rates remaining in restrictive territory — a fact which ought to throw cold water on economic growth — the MPC has lifted its GDP forecast to 0.7%, up from the 0.4% expected at the committee’s July meeting. “While households and firms exhibit some resilience, economic growth has been volatile and highly sensitive to new shocks,” the MPC said in its statement on Thursday.

“An improvement in logistics and a sustained reduction in load-shedding, or greater energy supply from alternative sources, would significantly increase growth.”