The South African Reserve Bank’s Monetary Policy Committee (MPC) announced today that the repo rate will remain unchanged. Governor Lesetja Kganyago explained the decision, highlighting the complex global and domestic economic landscape.
Global inflation and repo rates
Kganyago noted that global inflation is easing, but not yet stable. For instance, inflation in June was 3% in the United States and 2.5% in the euro area, still above their 2% targets. Despite progress, inflation remains a concern due to persistent high costs for services and wages, supported by strong economic activity and low unemployment rates. This has kept global interest rates high, with varying policies in different countries. While Canada, Switzerland, and the euro area have lowered rates, the United States, the United Kingdom, and Japan have kept them unchanged.
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South Africa’s Economic Performance
Turning to South Africa, Kganyago described the country’s economic performance in the first half of the year as disappointing. The economy shrank by 0.1% in the first quarter, and recent data, including last week’s mining and manufacturing numbers, led to a slight reduction in the second quarter growth estimate to 0.6%. However, Kganyago expressed optimism for medium-term growth, expecting improvements from a more reliable electricity supply and better logistics.
Inflation Outlook in South Africa
On the inflation front, the latest data for May showed a headline inflation rate of 5.2%, unchanged from April. The outlook, however, has improved slightly, with projected headline consumer price inflation for this year now at 4.9%, down from 5.1%. Over the next few quarters, inflation is expected to dip below the 4.5% midpoint, mainly due to lower fuel and food prices, supported by a stronger rand.
Kganyago acknowledged that inflation expectations are still above the Reserve Bank’s 4.5% target but are moving in the right direction. He anticipates further progress as inflation slows, helping to anchor expectations firmly at the midpoint.
Risks and Policy Commitments
Despite the improved forecast, Kganyago warned of several risks. Global interest rates remain high, especially in the United States, and could stay elevated longer than expected, posing risks to the currency outlook. Domestically, inflation expectations still do not fully reflect the 4.5% target. Additionally, administered prices, particularly for electricity, and services price inflation remain high.
Kganyago reiterated the MPC’s commitment to stabilizing inflation at the midpoint of the target range. He emphasized that the Committee’s decisions will continue to be data-dependent and sensitive to the balance of risks. He also highlighted the importance of structural reforms to improve economic conditions, including managing public debt, enhancing network industries, lowering administered price inflation, and aligning real wage growth with productivity gains.
The next MPC statement is scheduled for September 19, 2024.