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Economists predicted that the Reserve Bank would keep the repo rate unchanged due to geopolitical risks and low economic growth in SA.
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The Reserve Bank has decided to keep the repo rate unchanged, as economists expected, despite inflation remaining at 3.2% for the second month in February.
South African Reserve Bank (Sarb) Governor Lesetja Kganyago said on Thursday that four members of the Monetary Policy Committee (MPC) voted to keep the repo rate unchanged at 7.5%, while the other two preferred a cut of 25 basis points.
“The world economy is experiencing extreme levels of uncertainty. Trade tensions have escalated, and longstanding geopolitical relationships are shifting abruptly. In these circumstances, the global economic outlook is unpredictable.
“Germany has set out plans for large investments in security and infrastructure, which are likely to lift European growth. Meanwhile, China has announced new stimulus measures to bolster demand.”
Kganyago pointed out that economic sentiment is volatile in the US, with the year starting with surging stock prices and a stronger dollar.
“However, more recently, the disruptive effects of tariffs and policy uncertainty have come into focus.
“Growth expectations have now slipped, the dollar has weakened, and US stock markets have given up recent gains.
“By contrast, asset prices in other economies have been resilient, with most major currencies strengthening against the dollar.”
He said inflation in advanced economies remains elevated, with both headline and core inflation above 2% in the US, the Euro area, the United Kingdom and even Japan, with major central banks still expected to make some policy adjustments this year. However, he said, rates will likely remain high for longer, given new inflation risks.
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Turning to South Africa, Kganyago pointed out that economic growth picked up in the fourth quarter of 2024. As expected, the uptick was led by the household sector, boosted by lower inflation and withdrawals under the two-pot retirement system.
However, he said, the overall growth picture was disappointing, with other sectors showing weakness. Growth for 2024 as a whole was only 0.6%, marginally below the Sarb’s expectations and slightly worse than in 2023.
In addition, the Sarb now revised its 2025 growth forecast slightly down to 1.7%, leaving the outer years unchanged. “We attribute lower growth partly to subdued demand and partly to lingering supply-side fragilities. We assess that the risks to growth are to the downside.”
While inflation is still in the bottom half of the Sarb’s target range, it has edged higher over the past few months. “We continue to see low inflation for goods, which is likely to be temporary. Services inflation is somewhat higher but still below the 4.5% target midpoint. Inflation expectations are close to the midpoint. For now, inflation appears contained.”
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Kganyago said the outlook for the current forecast had more moving parts than usual, including Statistics SA’s reweighting of the Consumer Price Index and the proposed Value Added Tax (VAT) increases announced in the Budget.
“We also adjusted assumptions, such as the oil price, to reflect shifts in global markets. The overall result of these changes is a marginally lower inflation outlook, with headline now projected at 3.6% this year and 4.5% next year, mainly due to the better fuel-price projections.
“It also reflects a more benign path for administered prices, given the lower electricity tariffs announced by Nersa in February. These factors offset pressure from the proposed VAT increases, which we think will add about 0.2% to headline inflation.”
The MPC found risks to this forecast on the upside and the downside, with the balance of risks in the medium term skewed to the upside, the governor said.
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Against this backdrop, the MPC decided to keep the policy rate unchanged at 7.5%, Kganyago said.
“For several quarters, we have enjoyed rising confidence in South Africa, with a smaller country risk premium and lower bond yields. However, the global economy is not stable, and there are also domestic uncertainties, which put these favourable trends at risk. This calls for a cautious policy approach.”
He said the forecast still sees rates stabilising at a neutral level of about 7.25%. “This rate path from the Quarterly Projection Model remains a broad policy guide. The MPC would like to emphasise that its decisions will be made on a meeting-by-meeting basis. It will continue to be outlook-dependent, responsive to data developments and sensitive to the balance of risks to the forecast.”
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Given the uncertain global situation, the MPC spent time exploring different external scenarios during this meeting. “For one, we considered a slowdown in the US, with a weaker dollar and higher commodity prices, especially for gold.
“This implied some modest benefits for the South African economy, given better terms of trade and a stronger rand. Therefore, inflation and the policy rate were a little lower, relative to the baseline forecast.”
In addition, the MPC explored scenarios built around changes in South Africa’s access to US markets. Kganyago said if South Africa were to lose its African Growth and Opportunity Act (Agoa) benefits, we see some weakening of exports and slightly lower growth.
“If that were compounded with tariffs on South African exports, the effects would be larger. The most severe scenario we considered added a sentiment shock, with a weaker rand, higher domestic inflation and therefore a tighter policy stance.”
He said that growth would be lower by 0.7% in this case, with the exchange rate depreciation offsetting some of the tariff effects on exports. “In a difficult global environment, it is vital to sustain domestic reforms that boost growth while preserving macroeconomic stability.”
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Kganyago emphasised that the MPC’s main contribution is to deliver low and stable inflation with well-anchored inflation expectations. “The committee remains vigilant and ready to adjust policy as needed.”
He said additional measures that would improve economic conditions include reaching a prudent public debt level, further repairing and strengthening network industries, lowering administered price inflation and keeping real wage growth in line with productivity gains.
The Sarb’s GDP projection for the first quarter is 0.4% and 0.5% for the second quarter. Growth for the current calendar year has been marked down slightly, from 1.8% to 1.7%.
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