Repo rate unchanged thanks to inflation moderating

Consumers heaved a collective sigh of relief on Thursday when the Reserve Bank decided to keep the repo rate at its current level of 8.25% per year.

The decision came after Statistics SA announced on Wednesday that inflation decreased by almost one percentage point in June to 5.4% from 6.3% in May.

This means that the prime lending rate will remain at 11.75%. Three members of the Reserve Bank’s Monetary Policy Committee voted to keep rates on hold and two preferred an increase of 25 basis points.

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Lesetja Kganyago, governor of the South African Reserve Bank (Sarb), said near term prospects for the global economy are broadly unchanged, with inflation easing and growth forecasts stable but the longer-term economic outlook remains clouded by risks to the inflation trajectory, ongoing geopolitical tensions and the effects of climate change.

“China’s growth performance is expected to remain modest, with little benefit to commodity prices. In the developing world, many economies face high debt levels, weaker economic growth and prolonged adverse financing conditions. As a result, sub-Saharan Africa’s growth prospects remain muted.” 

He added that although goods price inflation eased in much of the world, core inflation remains elevated, preventing consumer price inflation from falling more sharply. “Globally, monetary policy is likely to remain focused on ensuring inflation continues to retreat, implying policy rates will stay higher. We expect markets in major financial centres to remain volatile.”

The Sarb therefore revised its forecast for global growth in 2023 marginally higher to 2.5% from 2.4% and unchanged at 2.7% in 2024.

Longer-term outlook uncertain

Kganyago also warned that while South Africa’s economic conditions appear to have improved, the longer-term outlook mirrors the uncertainty of the global environment, with prices for commodity exports continuing to weaken, while energy supply remains unreliable. Stronger El Nino conditions also threaten the agricultural outlook. 

The Sarb’s forecast for South Africa’s gross domestic product (GDP) growth is slightly higher than in May at 0.4% from 0.3%, although energy and logistical constraints limits economic activity and increasing costs. The GDP growth forecast for 2024 remains at 1.0% and at 1.1% for 2025.

“While households and firms exhibit resilience, economic growth has been volatile for some time and highly sensitive to new shocks. An improvement in logistics and a sustained reduction in load shedding, or greater energy supply from alternative sources, would significantly increase growth,” Kganyago said.  

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South Africa’s external financing needs are also expected to rise due to expansion in the current account deficit, while sharply lower tax revenue, higher employee compensation and ongoing financing needs of state-owned enterprises are likely to keep the long-term cost of borrowing elevated. 

Kganyago also pointed out the rand’s weakening over the past year, depreciating by about 5% against the US dollar, while showing high volatility in response to risk-on and risk-off episodes.

Better monthly outcomes also resulted in a downward revision in the Sarb’s forecast for core inflation to 5.2% in 2023 (previously 5.3%), 4.9% (from 5.0%) in 2024 and 4.5% (from 4.6%) in 2025. With core goods and food inflation lower in the near term, the Sarb revised headline inflation for 2023 down to 6.0% (from 6.2%). The headline inflation forecast for 2024 also decreases to 5.0%, before stabilising at 4.5% in 2025. 

Inflation and repo rate could still increase again

However, Kganyago said there are still risks that inflation can increase again although headline inflation at a global level continues to moderate, while food price inflation remains high and oil markets tight.

“Despite recent easing in some food price components, domestic food price inflation is still elevated at 11% in June and the risk of drier weather conditions in coming months has increased. In the absence of sustained and consistent increases in energy supply, electricity prices continue to present clear inflation risks.

“Load shedding and logistics constraints may also have broader effects on the cost of doing business and the cost of living. Given uncertain fuel and food price inflation, considerable risk still attaches to the forecast for average salaries.” 

He said sticky inflation in major economies suggests that average interest rates in these economies will remain high and tighter global financial conditions are likely to persist, raising the risk profile of economies needing foreign capital. 

“At the current repurchase rate level, policy is restrictive, consistent with elevated inflation expectations and the inflation outlook. 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.”

Kganyago said 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 MPC 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.”