Lesetja Kganyago, governor of South Africa's central bank. (Waldo Swiegers/Bloomberg via Getty Images)
The South African Reserve Bank’s monetary policy committee (MPC) has opted to hold the repo rate at 8.25% — the highest level since 2009. The decision was unanimous.
After announcing Thursday’s decision, Reserve Bank governor Lesetja Kganyago noted that there isn’t “a discernible trend” signalling that inflation is declining towards the central bank’s target.
“And so, for as long as there isn’t any sustained decline or inflation towards our target — and, more importantly, that inflation stays there in a sustained manner — don’t expect us to recalibrate policy.”
Data from Statistics South Africa earlier this week showed that inflation cooled to 5.1% year-on-year in December 2023 from 5.5% in November, marking the lowest year-on-year rise in prices since September last year.
Despite this easing, economists do not expect any rate cuts until later this year, when the inflation rate is expected to move closer to the midpoint of the Reserve Bank’s 3% to 6% target range.
Commenting on the December inflation data, Kganyago said: “We had a good print this week, it came out at 5.1. And we just hope that momentum is sustained and we get to the 4.5 and stay there sustainably so that we can be confident to recalibrate policy.”
The MPC’s statement noted that, compared with many other emerging and advanced economies, the rise in South Africa’s headline inflation rate was more gradual and peaked lower. “However, the return to target has been slow. The inflation rate remains sensitive to changes to both global and domestic supply and demand.”
Headline inflation for 2023 (6%) came in higher than the MPC’s previous forecast of 5.8%. But the MPC’s headline inflation forecast for 2024 remains the same at 5%.
Although the MPC believes inflation will continue to moderate, the committee assessed risks to the outlook on the upside, noting that ongoing geopolitical tensions will keep global oil markets tight.
The MPC noted that medium and longer-term inflation expectations, considered a key guide in the committee’s decision-making, remain elevated. “Achieving permanently lower inflation and interest rates requires inflation expectations to be closely anchored to the mid-point of the target band,” it said.
The committee also flagged the rand’s weakness, which stands to keep inflation elevated. The MPC’s statement noted that geopolitical uncertainties, as well as South Africa-specific factors — including sluggish growth and dependence on commodity export prices — continue to weigh on the value of the currency.
The rand depreciated by about 11% against the US dollar over the past year, making it one of the worst performing emerging market currencies, according to the MPC.
After South Africa’s economy contracted in the third quarter of 2023, the MPC revised down its forecast for GDP growth last year to 0.6%, from 0.8% previously.
South Africa’s structural constraints, including the country’s crumbling logistics infrastructure and load-shedding, weighed on growth last year, the MPC said. “These constraints are expected to persist, severely limiting potential growth of the economy.”
With the Reserve Bank seeming to prescribe to the “higher-for-longer” mantra, it could still be some time before the central bank administers relief through rate cuts. Some economists believe that by the time the MPC meets in May, it could be in a position to cut interest rates.
Reacting to the MPC’s decision, Debt Rescue chief executive Neil Roets said “the protracted cycle of steep interest rates that has taken borrowing costs to their highest level in more than a decade, has decimated the lives of South Africans”.