Repo rate stays unchanged at 8.25%

The Monetary Policy Committee of the Reserve Bank on Thursday decided to keep the repo rate unchanged at 8.25% as most economists expected. The decision was unanimous.

Lesetja Kganyago, governor of the South African Reserve Bank (Sarb), made the announcement this afternoon, saying the decision was taken against the backdrop of higher inflation that generally resulted in elevated inflation expectations across markets, businesses and households.

There were concerns the Monetary Policy Committee (MPC) would hike the repo rate on Thursday after the unexpected increase in the inflation rate on Wednesday from 5.4% in September to 5.9% in October.

Kganyago warned that while the Sarb’s baseline inflation forecast improved, risks to the inflation outlook were still assessed to the upside.

“Even as global headline inflation moderates, oil markets are tight and core inflation is sticky. Despite recent easing in some food price components, domestic food price inflation remains volatile and increased in October to 8.7%.”

He pointed out that the El Niño weather conditions also presented longer-term concerns. Over the year, imported goods inflation increased and remained sensitive to currency weakness.

“Electricity prices continue to present clear inflation risks and with logistics constraints are likely to have broader effects on the cost of doing business and the cost of living.”

Due to uncertain fuel and food price inflation, there is also considerable risk in the forecast for average salaries. In addition, sticky inflation implies that average policy rates in G3 economies will remain high, at about 4.3% in 2024 compared to the 1.1% average rate seen in 2022, Kganyago said.

“These tighter global financial conditions will raise the risk profile of economies needing foreign capital. Sharply lower tax revenue, higher employee compensation and ongoing financing needs of state-owned enterprises are expected to keep South Africa’s long-term cost of borrowing elevated.  Despite an expected moderation in inflation, long-term bond yields currently trade around 12%.”  

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MPC still aiming for mid-point of inflation target band

Kganyago added that medium and longer-term market expectations for inflation remain elevated, with the September survey of the Bureau for Economic Research showing average inflation expectations are lower at 6.1% for 2023.

“However, the MPC would prefer to see expectations anchored at the mid-point of the inflation target band.”

The MPC makes monetary policy to achieve the inflation target is between 3 and 6%. The governor said at the current repo rate, policy is restrictive and consistent with the inflation outlook and elevated inflation expectations.

“Serious upside risks to the inflation outlook remain. In light of these risks, the MPC remains vigilant and stands ready to act should risks begin to materialise. Decisions will continue to be data dependent and sensitive to the balance of risks to the outlook.”

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, he said.

“The MPC will seek to look through temporary price shocks and focus on potential second round effects and the risks of de-anchoring inflation expectations.”

Kganyago said guiding inflation back towards the mid-point of the target band reduces the economic costs of high inflation and will achieve lower interest rates in the future.

“Since early 2020, the MPC has recommended additional means of lowering inflation that are within the reach of the public sector, including achieving a prudent public debt level, increasing the supply of energy, keeping administered price inflation low and real wage growth in line with productivity gains. These steps would strengthen monetary policy effectiveness and its transmission to the broader economy.”

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Longer-term economic outlook uncertain

He also emphasised that the longer-term economic outlook remains uncertain, while weaker household consumption and falling property prices may drag on growth for a sustained period and climate change and geopolitical tensions can threaten supply chains, output and prices.

“With high interest rates and uncertainty, financial markets and asset prices are expected to remain volatile, dampening investor appetite and capital flows. Taking these and other factors into account, the Sarb’s forecast for global growth in 2023 is broadly unchanged at 2.7% from 2.6% and 2.6% in 2024.”

The Sarb also does not expect domestic growth to pick up soon, although load shedding declined. Kganyago said energy and logistical constraints were still binding on economic activity and generally increased costs.

“However, we expect electricity supply to increase gradually over the medium-term, helping to raise our forecast for output growth in 2024, 2025 and 2026.  Spending by firms, households, public corporations and general government remains positive in real terms, on an annual basis.”

Households’ disposable income was expected to grow, although growth would be slow, while credit growth to households and corporates had also slowed in recent months but remained positive. The Sarb also revised gross domestic product (GDP) growth for 2023 slightly upward to 0.8% from the September figure of 0.7%.

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Sarb increases GDP growth forecast

The GDP growth forecast for 2024 and 2025 was also increased from the previous meeting to 1.2% for 2024 and 1.3% for 2025, largely due to an expected decrease in load shedding.

”A sustained reduction in load shedding or greater energy supply from alternative sources, would significantly increase growth.”

However, Kganyago said, the operation of ports and rail have become a serious constraint and currently the Sarb assesses the risks to the medium-term domestic growth outlook to be balanced, as demand continues to run ahead of the constrained supply environment. 

About the inflation outlook, Kganyago said the country’s headline inflation rate has increased more gradually than in many other emerging and advanced economies.

“Nonetheless, South Africa’s inflation rate remains sensitive to shocks. While volatile in recent weeks, oil prices have increased over the year and commodity export prices have moderated further.”

He also warned that the country’s external financing needs will increase as the current account deficit expands from a forecasted 1.3% of GDP this year (from 2.0%), to 2.6% of GDP in 2024 and to 3.5% of GDP in 2025. 

Kganyago also referred to the Rand that weakened over the past year, depreciating by about 9.5% against the US dollar.

“The lack of sustained economic growth and dependence on commodities is reflected in the high volatility of the currency in response to global risk-on and risk-off episodes.”