Relief for South Africans as Reserve Bank holds rates

 ·20 Jul 2023

The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) has voted to hold rates.

This keeps the repo rate at 8.25%, with the prime lending rate at 11.75%.

The hold on rates signals a pause in the SARB’s hike cycle that started in November 2021 – but does not mean the end of the cycle.

According to SARB governor Lesetja Kganyago, at the current repurchase rate level, policy is restrictive, consistent with elevated inflation expectations and the inflation outlook.

However, he warned that serious upside risks to the inflation outlook remain.

“In light of these risks, the MPC remains vigilant and decisions will continue to be data dependent and sensitive to the balance of risks to the outlook,” he said.

When asked whether interest rates have peaked, Kganyago said the answer is “a resounding no”.

“Further than this, it depends on what happens to inflation,” he said. “It depends on the data and risks.”

The hold was also a close call. Three members of the MPC preferred to keep rates on hold, and two preferred an increase of 25 basis points.

Kganyago said that, while inflation has come down and markets have found some stability, the long-term economic outlook remains cloudy.

The forecast for global growth is revised marginally higher to 2.5% for 2023 and remains unchanged at 2.7% in 2024.

For South Africa, while conditions appear to have improved, in reality, the situation remains uncertain, particularly with longer-term weather conditions and the impact of El Nina on the agricultural sector.

Despite this, the local GDP forecast is slightly higher at 0.4%, up from 0.3% from the previous meeting, he said. The forecast for 2024 and 2025 remain unchanged at 1.0% and 1.1%, respectively.

As with previous statements, Kganyaho highlighted that, without load shedding, the country’s growth prospects would be much higher. The prevailing energy crisis continues to weigh heavy on the economy.

At the same time, lower tax revenue, higher wages, and greater requirements for funding by state-owned companies are likely to keep borrowing costs high – also weighing on South Africa’s growth prospects.

On the more positive side, inflation is coming under control, with key pressures being revised lower.

Fuel price inflation is lower, and food price inflation has also been revised lower – although it remains high, globally. Electricity price inflation is unchanged, he said, but the instability of supply – especially load shedding – is a significant inflation risk for various sectors.

The headline inflation forecast is now seen as 5.4% for the year, within the SARB’s target range.

“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 Committee has recommended additional and indirect 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, moderating administered price inflation and keeping wage growth in line with productivity gains.

“Such steps would strengthen monetary policy effectiveness and its transmission to the broader economy.”

Read: Godongwana sides with Reserve Bank – not the ANC – on interest rates

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