Repo rate remains unchanged again at 8.25%

The e Reserve Bank’s Monetary Policy Committee has decided to keep the repo rate unchanged again at 8.25%, in line with the expectations of economists.

The decision was unanimous.

Lesetja Kganyago, governor of the South African Reserve Bank (Sarb), announced the decision this afternoon, noting that at the current repurchase (repo) rate level, policy is restrictive, consistent with the inflation outlook and the need to address rising inflation expectations.

The MPC independently makes monetary policy to achieve the inflation target of between 3 and 6%. The monetary policy is implemented by setting a short-term policy rate called the repo rate, which affects the borrowing costs of the financial sector which in turn affects the broader economy.

Kganyago warned that there are still serious risks that could cause inflation to increase from global and domestic sources, while the economic outlook is highly uncertain.

The decision came after Statistics SA announced on Wednesday that the inflation rate for December eased to 5.1%, down from 5.5% in October.

“The inflation and repo rate projections from the updated quarterly projection model remain a broad policy guide, changing from meeting to meeting in response to new data. Future committee decisions will be data dependent and sensitive to the balance of risks to the outlook.”

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Guiding inflation back to the mid-point is important for the repo rate

Kganyago emphasised that guiding inflation expectations back towards the mid-point of the target band will improve the economic outlook and reduce borrowing costs.

“Since early 2020, the MPC has recommended additional means of strengthening economic conditions, 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 also strengthen monetary policy effectiveness and its transmission to the broader economy. Kganyago said global economic conditions remain mixed and the outlook uncertain and while headline inflation continues to ease in much of the world, core inflation remains sticky and high.

Advanced and emerging economies will likely see modest economic growth this year, despite better-than-expected outcomes in 2023. He said in most countries reaching inflation targets, reducing fiscal deficits and containing or lowering debt levels will stay as key policy priorities, while financing conditions are expected to remain tight.

“The longer-term economic outlook is also uncertain, as geo-political tensions and climate change threaten supply chains, output and prices. This uncertainty, alongside high-interest rates and debt, will dampen investor appetite and capital flows, resulting in volatile financial markets and asset prices.”

Therefore, the Sarb expects relatively weak global growth of 2.6% in 2024.

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Weak GDP due to energy and logistics constraints

Kganyago said the domestic gross domestic product (GDP) outcome for the third quarter of 2023 was weaker than expected, at a negative 0.2%.

“We expect the fourth quarter to show some improvement, with output expanding by 0.4%. The weaker performance of the economy in the latter half of 2023 is in line with Sarb’s forecast.

He also pointed out that the operation of ports and rail has become a serious constraint and, alongside electricity shortages, contributed to weak output growth and higher costs last year.

“These constraints are expected to persist, severely limiting the potential growth of the economy. While we expect electricity supply to increase gradually over the longer term, its contribution to short and medium-term growth has not been revised after the upward adjustment made at the time of the November meeting.”

For 2023 as a whole, the Sarb revised GDP growth down slightly to 0.6% from the November figure of 0.8%, while the GDP growth forecast of 1.2% for 2024 and 1.3% for 2025 is unchanged from the previous meeting.

“At present, we assess the risks to the medium-term domestic growth outlook to be balanced. With the weaker GDP outcome in 2023, our current growth forecast leaves the output gap marginally negative and at zero in the outer years of the forecast.”

Kganyago pointed to the fact that the Rand depreciated over the past year by about 11% against the US dollar, making it one of the worst-performing emerging market currencies.

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Inflation expectations that will affect the repo rate

Fuel price inflation is expected to be low, averaging below 1% in 2024, but food price inflation is revised slightly higher for 2024, to 5.7%, but remains broadly unchanged over the forecast period.

Core inflation was 4.9% in 2023 and is forecast little changed at 4.6% for 2024 and 2025 and 4.5% in 2026. The forecast for 2024 services price inflation remains unchanged at 4.8%.

Headline inflation was 6.0% in 2023 and Kganyago said, with few significant changes to the forecasts for underlying components, headline inflation for 2024 is expected to ease to 5.0%, to 4.6% in 2025 and 4.5% in 2026.

“Recent increases in egg and potato prices remind us that domestic food price inflation remains unpredictable and high. Electricity prices and logistics constraints continue to present clear inflation risks. With fuel and food price inflation remaining volatile, the risk still attaches to the forecast for average salaries.”

Sticky inflation in G3 economies implies that their average policy rates will remain elevated, at about 4.3% in 2024 compared to the 1.1% average rate seen in 2022, he said.

“South Africa’s long-term cost of borrowing is expected to remain high. Despite moderating inflation, long-term bond yields currently trade around 12%.”

Kganyago pointed out that the rise in inflation in 2022 generally resulted in higher inflation expectations across markets, businesses and households in 2023.

“Medium and longer-term market expectations for inflation remain elevated. The December survey of the Bureau for Economic Research shows average inflation expectations increased to 5.7% for 2024.”