Relief as Reserve Bank holds rates steady

South Africans breathed a sigh of relief on Thursday as the SA Reserve Bank (Sarb) decided to leave its key repo rate unchanged at 8.25%.

The move comes as consumer inflation hit a 20-month low for June, and means that the prime lending rate of commercial banks remains at 11.75%.

Sarb Governor Lesetja Kganyago announced the decision following the conclusion of the bank’s July Monetary Policy Committee (MPC) meeting.

He said three members of the MPC preferred the announced decision, while two members voted for a 25bp hike.

After rapidly raising rates at the previous 10 policy meetings, the MPC’s latest move to hold rates steady effectively ends its current hiking cycle, which has seen 475 basis points (bps) in repo rate increases since late 2021. This has taken interest rates to a 14-year high, as the Sarb moved to fight spiralling inflation.

Listen/Read: SA’s 5.4% June CPI worth a cheer

The decision to pause its rate hiking cycle comes a day after official data from Stats SA showed a considerable easing in inflation, which has slowed for the third consecutive month.

June’s inflation print of 5.4% falls within Sarb’s inflation target band, signalling that the effects of the central bank’s hiking cycle is filtering through.

Most economists and market watchers expected one last 25bp increase ahead of the July MPC meeting.

Kganyago said the Sarb’s GDP growth forecast is slightly revised upwards to 0.4%, up from its May estimate of 0.3%.

Headline inflation returned to the upper end of the inflation target range in June, and is forecast to sustainably revert to the mid-point of the target range by the third quarter of 2025. pic.twitter.com/OZicjEpQvZ

— SA Reserve Bank (@SAReserveBank) July 20, 2023

Kganyago noted that the trajectory of South Africa’s headline inflation rate has been shaped primarily by
fuel, electricity and food price inflation.

“Our food price inflation forecast for 2023 remains high but is revised lower in this meeting to 10.3%
[from 10.8%], and up slightly to 5.2% in 2024 [from 5%] … Better monthly outcomes have led to a downward revision in our forecast for core inflation to 5.2% in 2023 [previously 5.3%],” he said.

“With core goods and food inflation lower in the near term, headline inflation for 2023 is revised down to 6.% [from 6.2%].”

“The headline inflation forecast for 2024 also decreases to 5%, before stabilising at 4.5% in 2025,” he added.

However, Kganyago stressed that risks to the inflation outlook are still “assessed to the upside”, adding that energy and logistical constraints continue to dampen growth prospects due to limited economic activity and increasing operating costs.

“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,” the governor said.

“In the absence of sustained and consistent increases in energy supply, electricity prices continue to present clear inflation risks,” he said.

Reaction

The pause in the repo raising cycle is seen as consistent with the recent sizeable slowdowns in inflation over the past couple of months, which in June also landed back within the Sarb’s target band, FNB’s chief economist Mamello Matikinca-Ngwenya commented following the announcement.

“Signs of the transmission of monetary policy are starting to trickle in,” she said.

But the end of the Sarb’s raising spell may not be over just yet.

“To insulate their ability to reach the 4.5% inflation target in the medium term, the hiking cycle may be resumed, and most likely, interest rates will remain higher for longer,” Matikinca-Ngwenya said.

Professor Raymond Parsons at the North-West University School of Business & Governance called the Sarb’s hold decision a ‘hawkish pause’, as it sounded warnings about possible further interest rate hikes.

He said the divided vote of the MPC reflects the possibility that rates have not peaked.