No Reserve Bank rate hike — consumers sigh with relief

In a move that brought some relief to indebted consumers, the South African Reserve Bank unexpectedly kept its benchmark interest rate unchanged on Thursday despite soaring inflation, saying the policy stance is appropriate for now after the hike it implemented in May.

Economists, households and businesses had been bracing for another 25 basis point hike in the policy rate in July, more so after data from Stats SA on Wednesday showed consumer inflation soared to a two-year high of 5% in June mainly due to transport costs, pulling further away from the top end of the 2%-4% tolerance range of the Bank’s 3% target.

“The inflation outlook has improved slightly since our last meeting, but inflation is still too high, while growth is weak,” Bank governor Lesetja Kganyago told a media conference after its monetary policy committee (MPC) concluded the fourth of six meetings it holds annually.

“The committee agreed that the outlook is uncertain, and with the rate increase at our previous meeting, the policy stance is appropriate for now, with rates somewhat restrictive.”

Four of the committee members voted to keep the rate on hold, while two favoured a 25-basis point increase. Most economists polled by Reuters and Bloomberg predicted a 25-point rise to stem inflation pressures triggered by hefty fuel price increases since April due to global oil supply constraints caused by the US-Iran war.

The rand tumbled after the decision, weakening to a low of R16.76/$. Before the governor’s speech, it was 0.36% weaker, but by 4.50pm, it was 2% softer on the day at R16.74/$. This is as the Brent crude price went over $100 a barrel for the first time since May 26.

As South Africa is a net importer of oil and petroleum products, it has been particularly vulnerable to the turmoil that has rocked global oil markets since war broke out in late February.

Read: Reserve Bank keeps policy rate on hold at 7% despite soaring inflation

The retail price of 95-grade petrol has jumped nearly 29% to R26.10 per litre in the economic hub of Gauteng province since March, while the wholesale price of diesel has leapt almost 34% to R24.79, though it has come off a peak of R31.18 reached in May.

“The MPC’s decision to leave the repo rate unchanged provides welcome relief for consumers with debt, including mortgage holders, and for prospective home buyers,” said Andrew Golding, CEO of the Pam Golding Property group.

“While households continue to contend with elevated fuel prices and rising electricity and municipal tariffs, the decision offers greater certainty for consumers and businesses at a time of heightened global economic uncertainty.”

The Reserve Bank still sees upside risks to inflation, expecting the headline number to stay above 4% until early next year. Kganyago noted that recent prints have been well above the 3% target, adding, however, that this is mainly due to higher fuel costs.

“Aside from fuel, goods prices have been relatively contained. The exchange rate has been resilient, with the rand close to where it started the year against the dollar and stronger against the euro. This has helped with import prices,” he said.

“Food inflation has also slowed recently, which reflects good harvests, as well as fading effects from the outbreak of foot-and-mouth disease. El Niño may start affecting food supply next year, but this is still a risk factor, not part of our baseline.”

He said the Bank anticipates slower economic growth in the second and third quarters of the year, after GDP expanded more than expected at 0.5% in the first quarter.

With domestic reforms, the economy could get back to a rising growth trend as global conditions stabilise.

“Our baseline forecast is that the economy starts to recover in the second half of this year, as the shock fades. But the outlook is uncertain. We see downside risks to growth,” Kganyago said.

Though the MPC debate was whether to leave the repo rate unchanged or raise it, the Bank’s quarterly projection model continues to show a lower repo rate, at 6.79% in the fourth quarter of 2026 and 6.24% in the fourth quarter of 2027, noted Arthur Kamp, chief economist at Sanlam Investments.

“The bank, nonetheless, does warn that there are potential upside risks to inflation. And one of the key factors to watch here would be inflation expectations, which have been drifting higher and hold the risk of second-round effects,” Kamp said.

“If inflation expectations remain high or continue to drift upwards, the risk is that the Reserve Bank would need to hike again in the future.”

Business Day