The South African Reserve Bank has raised the repo rate by 25 basis points less than forecast, with the ongoing load-shedding crisis expected to hit the country’s economic growth in 2023.
Two of the five members of the bank’s monetary policy committee (MPC) favor a higher 50 basis point hike, which would be in line with consensus expectations.
But due to the suppressing effect of elevated interest rates on the economy, the final decision of the MPC will come as a relief to consumers, who have felt the pinch of higher borrowing costs compared to last year.
Following the announcement, Reserve Bank Governor Lesetja Kganyago said monetary policy was not in restrictive territory, adding that it remained supportive of economic growth.
The Reserve Bank, which targets price stability rather than employment or growth, has come under renewed scrutiny recently after the governing ANC once again took a resolution to change its mandate at the party’s elective conference.
Responding to the ANC resolution, Kganyago said the Reserve Bank did not wake up one day and decide to target price stability. “That’s because the people of this country decided.”
“Balanced and sustainable growth,” the governor said, “is not possible when inflation is raging and eating away at our people’s income. High inflation is not a growth strategy… High inflation is not a labor strategy.
The Reserve Bank has assessed the risks to the outlook for inflation to rise, citing continued tightness in the oil market, significantly higher electricity prices as well as load-shedding – which the MPC said could have a wider price effect on the cost of doing business and life.
Inflation cooled for the second month in a row in December to 7.2% year-on-year, marking the slowest annual increase since May 2022. The inflation print was slightly better than expected but still exceeded the upper bound of the Reserve Bank’s 3% to 6% target range.
December inflation also pushed the 2022 average (6.9%) above the Reserve Bank’s 6.7% forecast during the MPC’s previous meeting in November.
In response to last week’s inflation print, Investec chief economist Annabel Bishop noted that prices are likely to fall in the first half of 2023, as global economic growth is weak due to demand. Investec forecasts that inflation will average 5.3% annually in 2023.
Inflation has been sticky so far in South Africa and globally, Bishop said, but the first half of the year is expected to see measures of inflation fall (disinflation) more quickly. Domestic inflation is expected to reach the midpoint of the Reserve Bank’s target around mid-year.
The Reserve Bank’s 2023 headline inflation forecast is unchanged at 5.4%.
Fuel price inflation, which is the main driver of headline inflation in 2022, averaged 34.5% last year. It is expected to decrease to -2.7% in 2023 (down from 0.7%). The Reserve Bank’s core inflation – which excludes fuel and food prices – is forecast to decline, although it will only be 5.2% in 20223, compared to 5.5% previously.
Electricity and food price inflation in 2023, however, has been revised higher.
Local electricity price inflation is now expected to reach 12.9% in 2023, compared to 10.7% in 2022.
Food price inflation is expected to be 7.3% in 2023, up from 6.2%. Local food inflation is expected to remain elevated, despite global prices continuing to ease, as a result of the lagged effect of the rand’s weakness.
Meanwhile, the Rand has weakened slightly compared to the time of the November meeting. However, the domestic currency was stronger than it was two months before the meeting, as the strength of the dollar remained subdued amid fears of a US recession.
The starting point given for the rand forecast is R16.92 to the US dollar, compared to R17.68 at the previous MPC meeting.
According to the latest quarterly bulletin of the Reserve Bank, which was published in December, the rand exchange rate was suppressed by the negative effects of the increase in the load in the third quarter and in the fourth quarter of 2022.
The rand fell sharply late last week and earlier this week amid news that load-shedding will be a permanent feature for at least the next two years.
The MPC statement noted that, while the improved global outlook has increased appetite for riskier assets, the rand has been less buoyant than other currencies.
Load-shedding will weigh heavily on South Africa’s GDP in 2023, with the Reserve Bank forecasting just 0.3% growth this year – down from the 1.1% forecast at its November meeting.
At the November meeting, the bank predicted that the burden will reduce 0.6 percentage points of growth in 2023. The bank now expects the economy to lose two percentage points of growth as a result of the ongoing energy crisis.
“Over the medium term, the forecast assumes continued burdensome levels and lower-than-expected household spending and investment,” the MPC said in a statement on Thursday.
These factors, as well as lower commodity prices, led the Reserve Bank to cut its 2024 growth forecast to 0.7%, down from 1.4% previously. The bank now expects the domestic economy to grow by 1% in 2025, down from 1.5%.