Repo Rate Remains Unchanged at 8.25%
The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) has decided to maintain the repurchase rate at 8.25% per annum, keeping the prime rate steady at 11.75%. This decision reflects the preference of four MPC members for no change, while two members advocated for a 25 basis point reduction.
In his recent speech, SARB Governor Lesetja Kganyago highlighted that as we advance into the latter half of the year, global inflation rates are easing. The rapid price surges of 2022 and 2023 have moderated, but inflation in many economies is still not aligning with target levels. For instance, June saw consumer price inflation at 3% in the United States and 2.5% in the euro area, both exceeding the 2% target. Persistent inflation in services and wages, driven by robust economic activity and low unemployment, underscores that the fight against inflation continues, with global interest rates remaining high.
Economic Performance:
South Africa's economic performance in the first half of the year has been underwhelming. The economy contracted by 0.1% in the first quarter, and recent mining and manufacturing data have led to a modest adjustment in our second quarter growth estimate to 0.6%. Looking ahead, we expect faster growth driven by improvements in electricity supply and logistics, though our revised projections remain below the long-term historical average of about 2%. The forecast risks are balanced, with potential for structural reforms to further boost growth in the medium term.
Inflation Outlook:
Regarding inflation, the latest data shows a headline inflation rate of 5.2% for May, unchanged from April and still within the upper half of our target range. However, the inflation outlook has improved slightly, with the headline consumer price inflation projected to be 4.9% for the year, down from 5.1% previously. We anticipate that inflation will dip below the 4.5% midpoint in the coming quarters, primarily due to fuel and food price changes, supported by a stronger rand with an implied forecast exchange rate of R18.35 to the US dollar. Over the medium term, we expect inflation to stabilize at 4.5%, with core inflation closely tracking this midpoint target.
Inflation expectations remain above the SARB's 4.5% target, with the latest survey showing average expectations of 5% for next year and 4.9% two years ahead. Despite a reduction in expectations across all respondent categories, progress towards anchoring expectations at 4.5% is anticipated as inflation trends downward.
Policy Stance:
Given these conditions, the MPC has opted to keep the repo rate at 8.25%. The decision was supported by four members who favored maintaining the current rate, while two members suggested a 25 basis point reduction. The committee agreed that a restrictive monetary policy is necessary to stabilize inflation at 4.5%. Despite improved inflation forecasts, some members felt that the inflation outlook warranted a continued restrictive stance.
This strategic approach aims to balance the need for economic stability with the ongoing challenge of managing inflation effectively.