Repo rate increases by another 25 basis points

The repo rate has been increased by another 25 basis points to 4%. This against the backdrop of the increase in headline inflation to well above the mid-point of the inflation target band, with risks to the inflation outlook such as food and fuel prices that have already been realised, and other risks such as currency volatility and capital flow reversals becoming more pronounced.

According to Reserve Bank governor Lesetja Kganyago four members of the committee preferred an increase, while one member preferred it to remain unchanged. He said South Africa’s economy rebounded strongly from the pandemic last year, but going forward, the growth rate will, like global growth, be slow and remain subject to various risks.

The International Monetary Fund’s (IMF) forecast for global gross domestic product (GDP) is unchanged at 5.9% in 2021 and the Reserve Bank (Sarb) expects that global growth in 2021 sits at 6.2%, down from 6.3%, and is unchanged for 2022 and 2023, at 4.4% and 3.3%.

“Last year saw the ongoing recovery of the South African economy from the pandemic, but also the damage caused by the July unrest, cyberattacks and strikes. Those factors led to a downward revision to the growth forecast for the year as a whole, from the 5.2% forecast in November to 4.8%.”

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Economic growth

He said in 2022 and 2023, economic growth will remain well above a low rate of potential growth, with GDP expected to grow by 1.7% in 2022. This deceleration in growth from is primarily due to the fading rebound from the pandemic.

“Overall, and after revisions, the risks to the medium-term domestic growth outlook are assessed to be balanced.”

While important commodity export prices for minerals such as coal, iron ore, platinum and rhodium generally decreased in the last half of 2021, some prices and export values have been more buoyant recently.

Kganyago says therefore the current account surplus of the past year is expected to decline more slowly than at the time of the November meeting. “Although fiscal risk has eased, financing conditions remain volatile and the yield curve for rand-denominated bonds remains steep.”

Higher oil prices are expected this year, with fuel price inflation higher at 13.7% (up from 4.6%), while local electricity price inflation also higher at to 14.5% (from 14.4%) and remaining at 12.4% in 2023.

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Headline inflation

“In the near term, headline inflation has increased well above the mid-point of the inflation target band and returns close to the mid-point in the fourth quarter of 2022. Some risks to the inflation outlook, such as food and fuel, have been realised, and other risks, such as currency volatility and capital flow reversals, have become more pronounced.”

Against this backdrop, the MPC decided to increase the repurchase rate by 25 basis points to 4% per year, with effect from the 28th of January 2022.

Kganyago said given the expected trajectory for headline inflation and upside risks, the committee believes a gradual rise in the repo rate will be enough to keep inflation expectations well anchored and moderate the future path of interest rates.

“However, 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 committee will seek to look through temporary price shocks and focus on potential second round effects.”

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