The Reserve Bank has increased the repo rate by another 50 basis points to 8.25%, the highest level since 2009.
Consumers can thank rolling blackouts and the weaker rand for the added financial burden amid the cost-of-living crisis.
This is the second 50 basis points repo rate increase this year and the 10th in 18 months. It means the prime lending rate of commercial banks will now be 11.75%.
South African Reserve Bank (Sarb) governor, Lesetja Kganyago, announced the unanimous decision of the Monetary Policy Committee (MPC) on Thursday.
While economists liked the idea of a 25 basis points increase since the 50 basis points increase in March, they started to expect the 50 basis points increase after the fall of the rand due to the country’s friendship with Russia and load shedding returned to stages 5 and 6.
Although inflation decreased slightly in April as announced on Wednesday, Kganyago said higher inflation outcomes resulted in elevated inflation expectations, with expectations for inflation in 2023 based on market surveys sitting at 5.9%.
“Headline inflation is forecast to remain above the upper end of the inflation target range until the third quarter of this year and will only sustainably revert to the mid-point of the target range by the second quarter of 2025.”
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Repo rate increase due to inflation
Kganyago said persistent inflation and elevated financial stability risks continue to mark a somewhat improved global growth outlook but South Africa’s economic conditions remain poor.
“While goods price inflation has eased in much of the world, core inflation continues to rise, keeping consumer price inflation from falling more sharply. We expect global financial markets to remain volatile and policy rates elevated.”
He emphasised that energy and logistical constraints remain binding on South Africa’s growth outlook, limiting economic activity and increasing costs. Household spending is expected to grow very modestly in real terms, in line with a positive but weak increase in real disposable income.
“Economic growth has been volatile for some time and prospects for growth remain uncertain. An improvement in logistics and a sustained reduction in load shedding, or increased energy supply from alternative sources, would significantly raise growth.”
The rand’s weakness will lead to higher import prices and headline inflation will also create downside risks to growth. “Turning to inflation prospects, our current growth forecast leaves the output gap around zero over the next three years. This implies very modest positive pressures on inflation from the forecast growth rate. South Africa’s external financing needs however are expected to rise.”
He pointed out that the implied starting point for the rand forecast is R18.68 to the US dollar in the second quarter, compared to R17.80 at the time of the previous meeting. “Currency markets are expected to remain volatile and sensitive to idiosyncratic shocks. At the global level, consumer price inflation in 2023 is forecast to be 7.0%, compared to 8.7% in 2022.”
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Food inflation still higher
Compared to the previous meeting, fuel and electricity price inflation is somewhat lower and food price inflation higher, Kganyago said. Fuel price inflation is expected to be -2.0% in 2023 (down from -0.6%), while the electricity price forecast is also lower at 11.6% this year, 13.4% in 2024 and unchanged at 10.9% in 2025.
However, local food price inflation is revised up again, in part due to the lagged impact of the weaker exchange rate and despite global food prices falling in dollar terms.
Kganyago warned that there are increased risks to the inflation outlook. “Domestic food price inflation continues to be elevated and the risk of drier weather conditions in coming months has increased. Load shedding may additionally have broader price effects on the cost of doing business and the cost of living, as diesel consumption increases. Given sticky petrol and food price inflation, considerable risk still attaches to the forecast for average salaries.”
Economic and financial conditions are expected to remain more volatile for the foreseeable future and the governor said in this uncertain environment, monetary policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook.