Repo rate held on inflation forecast

SARB: ‘OVERALL, WE SEE GROWTH AT 1.2% THIS YEAR’

There is evidence of stronger inflation in services

Midpoint likely only at end of 2025, later than previously expected –Kganyago.

As expected, the South African Reserve Bank (Sarb) left the repo rate unchanged at 8.25% at the meeting of the monetary policy committee (MPC) yesterday, despite inflation increasing to 5.6% in February. The decision was unanimous.

Lesetja Kganyago, Sarb governor, said inflation expectations have moderated and although this was welcome, two-year ahead expectations are still in the top half of the Sarb’s target range.

Regarding food prices, he said the country was at a difficult juncture, although food inflation has slowed after hitting its highest point since 2008 last year. “But this is a critical time in the growing season and it has been unusually hot and dry, which may cause food inflation to pick up again.”

He also referred to the exchange rate, saying the rand has been trading weaker than expected at the last MPC meeting, partly due to interest rates in the major advanced economies staying high for longer.

“Since the start of the year, we have seen persistent global inflation pressures. Headline inflation rates are generally lower than they were a year ago, but underlying inflation is still elevated.

“Goods inflation has declined significantly, as supply shocks wear off, but there is evidence of stronger inflation in services, across a range of economies. Meanwhile, unemployment rates remain low, especially in the United States.”

In these circumstances, Kganyago said, major global central banks are expected to cut rates at a slower pace and at a later stage.

“A few emerging market central banks have been reducing rates, but these economies had the largest hikes previously and their interest rates are now well above inflation.”

The MPC also noted the Bank of Japan has increased interest rates for the first time since 2007.

Turning to South Africa, he pointed out that the economy performed worse than expected in the fourth quarter of last year, expanding only 0.1%, while growth for 2023 as a whole was 0.6%.

“The main reason for this bad performance was supply-side problems. Load shedding was worse than in previous years, while port and rail problems also emerged as binding constraints on output.

“Our forecasts indicate a modest growth acceleration from this year, as these supply-side constraints relax.”

Load shedding in particular was expected to ease. “While we estimate electricity shortages took 1.5 percentage points off gross domestic product last year, we think this will moderate to 0.6 percentage points this year and 0.2 percentage points in 2025.

“Overall, we see growth at 1.2% this year, improving to 1.6% by 2026. These projections are better than the 2023 outcome, but below longer-run averages, which are around 2%.”

Kganyago also said SA had a more gradual acceleration in inflation than many peer countries, with a lower peak, after Covid, but the return to target has been slow.

“The most recent inflation numbers showed yet another delay on the way back to our 4.5% objective, with headline inflation up to 5.6% in February. This is nearer the top of our target range than the midpoint.”

The increase was due to an acceleration in services, led by the medical aid component and services inflation which is now at its highest since 2019. This suggested that SA is joining the global trend of services, rather than goods, becoming a major source of inflation.

“We still see headline inflation heading back to 4.5%. However, given extra inflation pressure, headline now reaches the target midpoint only at the end of 2025, later than previously expected. As a result, the policy rate in our baseline forecast also starts normalising later.”

Kganyago warned that on balance, the various risks to the inflation forecast are skewed to the upside. –