The South African Reserve Bank has decided to maintain the repo rate at 7%.
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The South African Reserve Bank (SARB) has announced that the Monetary Policy Committee (MPC) has decided to keep interest rates unchanged with the repo rate at 7% and the prime lending rate at 10.5%.
The MPC, which met on Thursday, said in a statement issued by SARB governor Lesetja Kganyago, that it had considered scenarios for inflation expectations, as well as fuel prices before making its decision.
The decision comes after Statistics South Africa (Stats SA) on Wednesday reported that annual consumer inflation accelerated to 5% in June, up from 4.5% in May and above market expectations of 4.7%.
Providing an outlook on South Africa's economic growth, the MPC said first-quarter growth was stronger than expected, running close to 2% year-on-year but this was due to higher net exports rather than domestic demand.
“We anticipate slower growth through the second and third quarters of this year. Consumer confidence has fallen sharply, and business confidence has also weakened. Sectoral data show generally lower activity, since the start of the war. Prices for our export commodities have also fallen, although terms of trade are better, given lower prices for imports.
“We started this year with good momentum, but households have suffered from higher fuel prices, while uncertainty has weighed on investment. Our baseline forecast is that the economy starts to recover in the second half of this year, as the shock fades. But the outlook is uncertain.”
Regarding inflation, the committee said: “According to the latest survey from the Bureau for Economic Research, inflation expectations have risen. The changes are bigger for the near term than the longer term. All survey groups anticipated higher inflation, with the biggest change coming from trade unions. As for market expectations, breakeven rates have eased since May, but they are still higher than they were at the start of the year. We see upside risks to inflation.
“Four members preferred a hold, while two favoured an increase of 25 basis points. The committee agreed that the outlook is uncertain, and with the rate increase at our previous meeting, the policy stance is appropriate for now, with rates somewhat restrictive.”
Thys van Zyl, CEO of Everest Advisory Services, a financial services provider, said the decision suggests that the Reserve Bank is likely of the view that current inflationary pressures are primarily the result of external factors.
“The recent increase in inflation appears to be driven largely by external factors such as higher fuel prices and the knock-on effect these have on transport costs and the prices of other goods and services. In such an environment, an interest rate increase would likely have only a limited impact on current inflationary pressures while placing additional strain on an economy that is already struggling.”
Van Zyl said the decision will provide welcome relief for many South Africans.
“Households that are already under financial pressure now have an opportunity to stabilise their financial position without facing higher debt repayments. It also provides businesses with greater certainty when making investment and expansion decisions.”
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