South African Reserve Bank keeps repo rate unchanged amid economic challenges

South African Reserve Bank (SARB) decided on Thursday to leave interest rates unchanged in a split decision. Two of the six policymakers favoured a cut which could signal a shift toward easing as soon as September.

The SARB’s Monetary Policy Committee (MPC) left its benchmark interest rate unchanged at a 15-year high of 8.25 per cent for a seventh consecutive meeting.

“… the MPC decided to keep the repo rate unchanged at 8.25 per cent. Four members preferred an unchanged stance, and two preferred a reduction of 25 basis points.” the MPC said in a statement.

“MPC members agreed that restrictive policy remains appropriate to stabilise inflation at 4.5 per cent. 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.”

South Africa’s economic performance in the first half of the year was disappointing, the MPC added. “The economy contracted slightly in the first quarter, by 0.1 per cent, and recent data, including last week’s mining and manufacturing numbers, have caused us to trim our second quarter growth estimate modestly, to 0.6 per cent.”

“Over the medium term, we expect somewhat faster growth, supported by a more reliable electricity supply and improving logistics, among other factors. Our revised growth projections nonetheless remain below longer-run historical averages, of about 2 per cent. The risks to this forecast are assessed as broadly balanced, with ample scope for structural reforms to lift growth further over the medium term.”

Headline consumer price inflation remained at 5.2 per cent in May was 5.2 per cent, unchanged from April and still in the top half of the central bank’s target range.

“The outlook, however, has improved somewhat. Headline consumer price inflation for this year is now projected at 4.9 per cent, compared to 5.1 per cent at the previous meeting. Over the next few quarters, headline is expected to dip below the 4.5 per cent midpoint, mainly because of fuel and food prices. This outlook is supported by the stronger rand.”

The implied starting point for SARB’s forecast is now at R18.35 to the US dollar. “Over the medium term, we continue to see inflation stabilising at 4.5 per cent, with core inflation remaining close to this midpoint objective throughout.”

For inflation expectations, the latest survey results show average expectations at 5 per cent next year and 4.9 per cent two years ahead, still uncomfortably above the SARB’s 4.5 per cent objective, and above our own inflation forecasts.” the statement added. “However, all categories of respondents lowered their inflation expectations from the previous survey. We anticipate further progress as inflation slows, helping to re-anchor expectations firmly at 4.5 per cent.”

The SARB remains committed to achieving mid-point inflation within the target band. Structural reforms, prudent debt management, and addressing network industry challenges are essential for economic improvement.