The Reserve Bank left borrowing costs unchanged for a second consecutive meeting but struck a cautious tone amid persistent upside risks to the inflation outlook and a decline in fiscal sustainability, which continues to drive the country’s risk premium.
The decision to keep the repo rate at 8.25% on Thursday was in line with the latest Reuters analysts’ consensus showing that 29 out of 30 analysts expected no change in the repo rate, with only one forecasting a hike.
The monetary policy committee was split 3-2 on the decision, with two members opting for a rise of 25 basis points (bps).
Bank governor Lesetja Kganyago said that at the current repo rate, monetary policy remains in restrictive territory, with real interest rates now more than 3% and consistent with the inflation outlook and elevated inflation expectations.
“Serious upside risks to the inflation outlook remain. In light of these risks, the committee remains vigilant and stands ready to act should risks begin to materialise,” Kganyago said.
He added that the policy stance aims to anchor inflation expectations more firmly around the midpoint of the 3%-6% target band and to increase confidence in attaining the target sustainably over time.
Before the governor’s speech on Thursday, the rand was 0.8% weaker at R19/$. Within a few minutes of the announcement, it had recovered a little to R18.94/$, which was 0.56% weaker on the day.
The rand has retreated over the past year, depreciating by about 10% in the year to date against the dollar, and is showing high volatility in response to risk-on and risk-off episodes.
The implied starting point for the rand forecast for the fourth quarter is R18.45/$, compared with R18.13/$ at the time of the previous meeting.
The Bank made several forecast revisions to key economic variables after better-than-expected economic growth in the first half of 2023.
It revised upwards its growth projections to 0.7% for 2023, from 0.4% previously, but warned that economic growth will continue to be volatile and highly sensitive to new shocks in the absence of an improvement in the logistics network, a sustained reduction in load-shedding or greater energy supply from alternative sources.
The consumer inflation forecast was revised slightly downwards to 5.9% from 6% previously and May’s 6.2%.
Headline inflation for 2024 is forecast to be 5.1% — from the 5% forecast in July — before moderating to 4.5% in 2025, unchanged from the July meeting.
Public debt
Core inflation, which excludes volatile food and energy prices, is now expected to be 4.9% in 2023 from 5.2% in July (previously 5.3%). This is important because while core inflation has been within the target band for the past 26 months, it has remained above the midpoint of 4.5% for the past 10 months.
Kganyago said guiding inflation back towards the midpoint of the target band reduces the economic costs of high inflation and will achieve lower interest rates in the future.
“Since early 2020, the monetary policy committee has recommended additional 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 real wage growth in line with productivity gains,” he said.
“Such steps would strengthen monetary policy effectiveness and its transmission to the broader economy.”
Kganyago said sharply lower tax revenue, higher employee compensation and the continued financing needs of state-owned enterprises are expected to keep the long-term cost of borrowing elevated.
The Bank’s decision comes a day after the US’s federal open market committee, as expected, kept rates unchanged at a 22-year high of 5.25%-5.5% after a 25 bps hike in July. US Federal Reserve (Fed) chair Jerome Powell said recent indicators suggest that economic activity has been expanding at a solid pace and, so far in 2023, growth in real GDP has come in above expectations.
He said the Fed will cut rates by a smaller-than-expected margin in 2024. The comment surprised markets, triggering strong flows into the dollar, which saw the benchmark US 10-year treasury yield race to a 15-year high.
Stability
The Bank of England narrowly voted to keep its bank rate at 5.25% on Thursday, signalling the peak of borrowing costs after almost two years of hikes.
North-West University professor Raymond Parsons said the “hawkish pause” was the right decision by the monetary policy committee, taking into account the overall global and domestic factors shaping SA’s economic environment.
Parsons said the period of stability in borrowing costs experienced since May is a positive factor in business and consumer confidence at a time when both are in negative territory and when consumer spending, in particular, is under great pressure.
FNB CEO Jacques Celliers said the decision to maintain the repo rate at its current level provides some relief to households and businesses grappling with high fuel costs and the resumption of higher stages of load-shedding.
Pam Golding Property group CEO Andrew Golding said given the upside risks to the inflation outlook, the Bank may well not hike rates further but rather err on the side of caution by keeping interest rates higher for longer — in other words, cut interest rates later than some economists are expecting.
“Ultimately, however, the timing of interest rate cuts next year is likely to be determined by future economic and political developments both locally and internationally.”
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