Repo rate remains unchanged at 8.25%

The South African Reserve Bank (Sarb) Monetary Policy Committee (MPC) announced on Thursday that the repo rate will remain unchanged at 8.25%.

The repo rate has been at 8.25% since May last year after the MPC made an increase of 50 basis points.

Sarb governor Lesetja Kganyago says while some members preferred a change, others did not.

Kganyago says the committee assessed an unchanged stance was appropriate given the inflation risks. However, he says some members were of the view that the inflation outlook had improved enough to reduce the rate.

Four MPC members preferred an unchanged rate, while two preferred a reduction of 25 basis points

The battle against inflation is not won, yet

He says as the country moves into the second half of the year, global inflation continues to ease.

The rapid increases of 2022 and 2023 have receded. However, inflation in most economies has yet to stabilise in line with the targets.

“Clearly the battle against inflation is not yet won,” he says.

Kganyago highlighted a concern for central banks which is that lower inflation outcomes have not always been sustained. In South Africa, he says the county’s economic performance in the first half of the year was disappointing. Over the medium term, they expect a somewhat faster growth, supported by a more reliable electricity supply and improving logistics, among other factors.

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Light at the end of the tunnel

The most recent headline print for May was 5.2%, unchanged since April, and it is still in the top half of Sarb’s target range. He says the outlook has somewhat improved. Headline Consumer Price Inflation (CPI) for 2024 is projected at 4.9%, compared to 5.1% at the previous meeting. He says over the next few quarters, the headline is expected to dip below the 4.5% midpoint, mainly because of fuel and food prices.

He says the outlook is supported by the stronger rand exchange rate. “The implied starting point for our forecast is now at R18.35 to the US dollar. Over the medium term, we continue to see inflation stabilising at 4.5%, with core inflation remaining close to this midpoint objective throughout.”

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Inflation expectations

He highlighted that the latest survey results show an average expectation of 5% next year and 4.9% two years ahead. This is still uncomfortably above the Sarb’s 4.5% objective and above the inflation forecasts. However, all categories of respondents lowered their inflation expectations from the previous survey. They anticipate further progress as inflation slows, helping to re-anchor expectations firmly at 4.5%.

He adds that inflation expectations do not yet reflect the 4.5% midpoint objective over the medium term. While expectations are moving in the right direction, they continue to show the impact of the recent inflation surge.

“While the forecast has improved, the balance of risks is assessed to the upside.”

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Keeping the repo rate at 8.25%

He says the above-mentioned has influenced the MPC to keep the repo rate unchanged at 8.25%. Four members preferred an unchanged stance, and two preferred a reduction of 25 basis points. “In discussing the stance, MPC members agreed that restrictive policy remains appropriate to stabilise inflation at 4.5%. The committee assessed that an unchanged stance remained appropriate, given the inflation risks. Some members, however, were of the view that the inflation outlook had improved enough to reduce the degree of restrictiveness.”

Sarb on electricity inflation

He mentioned that the committee remains concerned about administered prices. “We have had to mark up electricity inflation for this forecast round, even as other categories shifted lower.” He also touched on how services price inflation also remains above the mid-point.

“We are committed to stabilising inflation at the mid-point of the target band. Achieving this outcome will improve the economic outlook and reduce borrowing costs.”