South African Reserve Bank hikes rates
The South African Reserve Bank’s Monetary Policy Committee (MPC) has decided to raise the repo rate to 4.25% per annum.
Reserve Bank governor Lesetja Kganyago said in a statement on Thursday afternoon (24 March), that the rate hike comes against a backdrop of higher global and local inflation.
Three members of the committee preferred the announced increase and two members preferred a 50 basis point rise in the repo rate.
“The implied policy rate path of the Quarterly Projection Model (QPM), given the inflation forecast, indicates gradual normalisation through to 2024. As usual, the repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks.
“Economic and financial conditions are expected to remain more volatile for the foreseeable future. In this uncertain environment, policy decisions will continue to be data-dependent and sensitive to the balance of risks to the outlook.
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.
“Better anchored expectations of future inflation could support lower interest rates and can be realised by achieving a prudent public debt level, increasing the supply of energy, moderating administered price inflation and keeping wage growth in line with productivity gains.
“Such steps will enhance the effectiveness of monetary policy and its transmission to the broader economy,” he said.
GDP growth
GDP growth is forecast to be 1.9% in both 2023 and in 2024. Economic growth at these rates remains well above a low rate of potential growth still constrained by load shedding and policy uncertainty, said Kganyago.
“Investment by the government sector has weakened significantly in recent years and that of public corporations is forecast to be very modest,” he said.
“Household spending remains supportive, as a result of good growth in disposable income, rising asset prices, and low interest rates, while private investment has also proved to be more resilient than previously expected.
Overall, and after revisions, the risks to the medium-term domestic growth outlook are assessed to be balanced, he said.
“With the low rate of potential growth at present and the upward revision to GDP growth for 2022 and 2023, the output gap closes faster over the forecast period compared to the January meeting. The output gap is expected to turn positive after the third quarter of 2023.”
Core inflation
Electricity and other administered prices continue to present short- and medium-term risks, he said.
“Higher diesel and coal prices may result in upward revisions to our electricity price forecast for 2023. Given below-inflation assumptions for public sector wage growth and higher petrol and food price inflation, considerable risk attaches to a still moderate nominal wage forecast.”
Core inflation is forecast to increase to 4.2% in 2022 (up from 3.8%), to 5% in 2023 (from 4.4%), before easing somewhat to 4.7% in 2024 (from 4.5%).
Core goods and services price inflation is forecast higher throughout the horizon, and services price inflation exceeds the mid-point of the target by the fourth quarter of this year, the governor said.
Read: 9 things that are now more expensive in South Africa – and how it will hit your grocery bill
Loading ...