The South African Reserve Bank (SARB) has left the door ajar for further interest rate hikes in the new year if consumer inflation swings higher than the current upper limit of 5.9% in November and December even though market sentiment was that rates have peaked.
In a hawkish statement yesterday, the SARB’s Monetary Policy Committee (MPC) unanimously decided to keep the repurchase rate (repo rate) unchanged at a 14-year high of 8.25%, leaving the prime lending rate at 11.75% per annum.
SARB Governor Lesetja Kganyago warned that serious upside risks to the inflation outlook remained and the MPC was ready to act should risks begin to materialise especially as the rand weakened over the past year, depreciating by about 9.5% against the US dollar.
However, Kganyago said that unless there was a noticeable deviation in the inflation trajectory, the repo rate should remain at current levels throughout most of 2024.
Kganyago said the SARB’s policy stance aims to anchor inflation expectations more firmly around the midpoint of the target band and to increase confidence of attaining the inflation target sustainably over time.
“The September survey of the Bureau for Economic Research shows average inflation expectations lower at 6.1% for 2023. The Committee, however, would prefer to see expectations anchored at the midpoint of the inflation target band,” Kganyago said.
“While our baseline inflation forecast has improved, risks to the inflation outlook are still assessed to the upside.”
Everest Wealth CEO Thys van Zyl said the decision to leave the interest rate unchanged for a third consecutive time was a missed opportunity as it would only further restrict consumer spending and will be bad for the economy as it could have given the economy a further boost in the last quarter.
“The weakness of the rand is a result of bad decisions by the government and must therefore be left to him to correct. Any further interest rate hikes will simply be to try to protect the rand's value and this is not the solution as political and economic instability bears the blame and, ultimately, consumers pay the price.”
The SARB revised down slightly its headline inflation forecast for 2023 from 5.9% previously to 5.8%, slowing to 5.0% in 2024 before stabilising at 4.5% in 2025 and 2026.
Better monthly outcomes led to a marginal downward revision in the bank’s forecast for core inflation to 4.8% in 2023, from 4.9% previously, and to 4.6% in 2024 from 4.7%.
This seems to suggest that although the SARB may be at or near the peak in the interest rate cycle, the first rate cut was likely a long way off still.
North-West University Business School economist Professor Raymond Parsons said that the tone of the statement still reflected a “hawkish pause” given the MPC’s continued concern about upside risks to inflation.
However, Parsons said a reasonable conclusion from the latest economic trends was that, barring shocks, South Africa’s interest rates might now have peaked.
Despite, therefore, some remaining price “stickiness and upside risks to the inflation outlook stressed by the MPC, the outlook for both global interest rates and domestic inflation trends is now pointing towards a possible end to the interest rate-raising cycle”, Parsons said.
“On present evidence, both the inflation and interest rate prospects are strengthening the case for no further hikes in borrowing costs, unless serious shocks emerge from an uncertain economic environment.”
Meanwhile, the SARB revised slightly upwards its gross domestic product (GDP) growth for 2023 to 0.8%, up from the September figure of 0.7%, and to 1.2% and 1.3% for 2024 and 2025, respectively, in large part due to an expected decrease in load shedding.
Kganyago said a sustained reduction in load shedding, or greater energy supply from alternative sources, would significantly increase growth.
However, he warned that the operation of ports and rail had become a serious constraint.
“At present, we assess the risks to the medium-term domestic growth outlook to be balanced, as demand continues to run ahead of the constrained supply environment. As a result, our current growth forecast leaves the output gap marginally positive,” he said.
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