Economists expect the South African Reserve Bank’s monetary policy committee to keep borrowing costs unchanged
The South African Reserve Bank’s monetary policy committee (MPC) has voted to keep interest rates unchanged for the third consecutive time, looking through the recent surprise bump in inflation.
The decision was unanimous.
The country’s repo rate, which affects the cost of borrowing, stands at 8.25% — the highest level since 2009 — and, for the time being, is considered sufficiently restrictive.
After the announcement, Reserve Bank governor Lesetja Kganyago gave no hints about when borrowers might receive relief through rate cuts, saying: “We don’t target interest rates, we target inflation. So, if you want to know where interest rates are going, look at where inflation is going.”
The MPC’s decision comes after data this week surprised analysts who were expecting a more moderate rise in inflation. November’s inflation rate came in at 5.9% year-on-year, higher than the 5.6% forecast by economists.
Despite this reacceleration in inflation, the MPC revised its 2023 headline inflation forecast down slightly to 5.8% from the 5.9% expected at the committee’s September meeting.
This comes off the back of lower core inflation, which excludes food and fuel prices — both of which are subject to volatility. Moreover, growth in average salaries and unit labour costs are forecast to be somewhat lower than at the time of the September meeting.
“While our baseline inflation forecast has improved, risks to the inflation outlook are still
assessed to the upside,” the MPC’s statement noted.
The MPC cited tight oil markets, El Niño’s impact on oil prices, as well as electricity costs and Transnet-related logistics constraints as ongoing risks.
The committee revised South Africa’s growth rate slightly higher — although at 0.8% (up from the 0.7% forecast in September) it remains well below the threshold for inspiring large-scale employment gains.
The country’s growth will continue to be hamstrung by load-shedding, which has eased in recent months. “Energy and logistical constraints,” the MPC noted, “are still binding
on economic activity and generally increase costs.”
With the energy crisis receding somewhat, the MPC flagged the operation of ports and railways as “a serious constraint”.
The MPC’s statement expressed some hawkishness going forward, noting that the committee will remain vigilant amid considerable upside risks. That said, the committee said it would seek to look through temporary price shocks “and focus on potential second-round effects and the risks of de-anchoring inflation expectations”.