SA Reserve Bank surprises by keeping rates on hold
The South African Reserve Bank’s Monetary Policy Committee has kept its benchmark policy rate, previously known as the repo rate, unchanged despite an increase in consumer inflation.
Most economists expected the Reserve Bank to hike rates by 25 basis points, especially after June’s consumer inflation hit 5%.
Central bank governor Lesetja Kganyago said that, globally, the renewed conflict in the Middle East has disrupted supply chains and damaged incomes, while the Artificial Intelligence (AI) boom has provided an offset.
The decision came as oil prices surged to $100 a barrel, as Iran-backed Houthi rebels targeted Red Sea shipping and US President Donald Trump threatened to strike them in return.
International benchmark oil contract Brent North Sea soared more than six per cent on Thursday to hit the symbolic $100 level, as the attacks potentially opened a new front in the Middle East war and Trump threatened the Houthis with "major military punishment".
ALSO READ: Oil soars to $100 on fresh Mideast attacks
"Overall, world growth and inflation forecasts are largely unchanged since our last meeting," said Kganyago.
He said that in South Africa, first-quarter growth was better than expected, but this was due to increased net exports rather than domestic demand.
"We anticipate slower growth through the second and third quarters of this year. Consumer confidence has fallen sharply, and business confidence has also weakened."
He added that the prices of commodities exported by South Africa have also fallen.
Kganyago said the country started with “good momentum” but that households struggled with higher fuel prices, as uncertainty took its toll on investment.
He said municipal growth has increasingly become a binding constraint on economic growth, but that with domestic reforms, the SARB believes the economy could get back to a rising growth trend.
"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."
The central bank head said inflation has been well above target because of fuel costs; despite petrol and diesel prices easing in July, global oil prices have risen again.
"We expect headline inflation to stay above 4% until early next year."
He said that, aside from fuel prices, the prices of goods have been relatively constrained, and the exchange rate has been resilient, with the rand closing the year near where it started against the dollar and stronger against the euro.
He added that this stronger rand helped with import prices.
"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."
Service inflation conditions look problematic, said Kganyago, adding that most components, including insurance, transport, and housing, are now well above 3%.
Based on these factors, the Monetary Policy Committee kept the policy rate at 7%, which leaves the prime lending rate used by commercial banks at 10.5%.
But this was not a unanimous decision, with four members of the MPC preferring to hold and two preferring a 25-basis-point increase.
"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,” said Kganyago.
"The forecast from our quarterly projection model shows the policy rate broadly stable through the remainder of the year. The model shows cuts later in the forecast, as inflation falls to 3% and rates adjust towards neutral levels."
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