Repo rate remains unchanged as expected at 8.25%

As expected, the South African Reserve Bank left the repo rate unchanged at 8.25% after the meeting of the Monetary Policy Committee, despite inflation increasing to 5.6% in February. The decision was unanimous.

Lesetja Kganyago, governor of the South African Reserve Bank, made the announcement on Wednesday afternoon.

He said inflation expectations have moderated in the latest survey and although this is welcome, two-year ahead expectations are still in the top half of the Reserve Bank’s target range.

Regarding food prices, he said the country is at a difficult juncture, though food inflation has slowed after hitting its highest point since 2008 last year.

“But this is a critical time in the growing season and it has been unusually hot and dry, which may cause food inflation to pick up again.”

He also referred to the exchange rate, saying that the rand has been trading somewhat weaker than expected at the last Monetary Policy Committee (MPC) meeting, partly due to interest rates in the major advanced economies staying high for longer.

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Persistent global inflation pressures

“Since the start of the year, we have seen persistent global inflation pressures. Headline inflation rates are generally lower than they were a year ago, but underlying inflation is still elevated. Goods inflation has declined significantly, as supply shocks wear off, but there is evidence of stronger inflation in services, across a range of economies. Meanwhile, unemployment rates remain low, especially in the United States.”

In these circumstances, Kganyago says, major global central banks are expected to cut rates at a slower pace and at a later stage.

“A few emerging market central banks have been reducing rates already, but these economies had the largest hikes previously and their interest rates are now well above inflation.”

The MPC also noted that the Bank of Japan has moved its policy rate into positive territory, increasing interest rates for the first time since 2007.

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SA economy performed worse than expected in fourth quarter of 2023

Turning to South Africa, he pointed out that the economy performed worse than expected in the fourth quarter of last year, expanding by only 0.1%, while growth for 2023 as a whole was 0.6%.

“The main reason for this bad performance was supply-side problems. Load shedding was worse than in previous years, while port and rail problems also emerged as binding constraints on output. Our forecasts indicate a modest growth acceleration from this year, as these supply-side constraints relax.”

He said they expect load shedding in particular to ease somewhat: “While we estimate electricity shortages took 1.5 percentage points off gross domestic product (GDP) last year, we think this will moderate to 0.6 percentage points this year and 0.2 percentage points in 2025.

“Overall, we see growth at 1.2% this year, improving to 1.6% by 2026. These projections are better than the 2023 outcome, but below longer-run averages, which are around 2%.”

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SA had more gradual increase in inflation

Kganyago also said that South Africa had a more gradual acceleration in inflation than many peer countries, with a lower peak, after Covid, but the return to target has been slow.

“The most recent inflation numbers showed yet another delay on the way back to our 4.5% objective, with headline inflation up to 5.6% in February. This is nearer the top of our target range than the midpoint.”

The increase was due to an acceleration in services, led by the medical aid component and services inflation is now at its highest since 2019. He says this suggests that South Africa is joining the global trend of services, rather than goods, becoming a major source of inflation.

“We still see headline inflation heading back to 4.5%. However, given extra inflation pressure, headline now reaches the target midpoint only at the end of 2025, later than previously expected. As a result, the policy rate in our baseline forecast also starts normalising later.”

Kganyago warned that on balance, the various risks to the inflation forecast are skewed to the upside.

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Restrictive policy stance

“At this level of rates, the policy stance is considered restrictive, consistent with the inflation outlook and the need to address elevated inflation expectations. The inflation and repo rate projections from the Quarterly Projection Model remain a broad policy guide, changing from meeting to meeting in response to new data.”

He emphasised that stabilising inflation at the mid-point of the target band will improve the economic outlook and reduce borrowing costs.

“We reiterate the views of the MPC on additional measures that would improve economic conditions. These include achieving a prudent public debt level, improving the functioning of network industries, lowering administered price inflation and keeping real wage growth in line with productivity gains.”