The South African Reserve Bank (Sarb) has given a strong indication that it might increase the borrowing costs as risks to the inflation outlook were assessed to the upside, even though it has paused its interest rates hiking cycle for now.
In a split decision, the Sarb yesterday kept its benchmark lending rate unchanged at a 14-year high of 8.25% per annum for the first time after 10 consecutive hikes since November 2021.
This comes after headline consumer inflation returned to the upper end of the inflation target range in June, easing by 0.9% to 5.4% in June, from 6.3% in May, due to softening fuel and some food prices.
Inflation is now forecast to sustainably revert to the 4.5% midpoint of the target range by the third quarter of 2024.
Sarb Governor Lesetja Kganyago yesterday said three members of the Monetary Policy Committee (MPC) preferred to keep rates on hold due to a generally stronger rand and lower inflation relative to the previous meeting.
However, two MPC felt inflation was still sticky and preferred an increase of 25 basis points.
Kganyago said the hawkish monetary policy stance aimed to anchor inflation expectations more firmly around the midpoint of the 3-6% target band and to increase confidence of attaining the inflation target sustainably over time.
He warned that the MPC could not say that this was the top of the hiking cycle yet, adding that future changes in the repurchase rate (repo rate) would be data dependent.
“The job is not done. The fight is still on. We are ready to deploy our tools to tackle this monster that is eating the income of South Africans,” Kganyago said.
“There are still risks on the horizon and we are remaining vigilant to those risks. Should there be an indication that those risks could materialise, we would act appropriately.
“Should we become more successful than we had initially thought, we might reconsider the policy stance that we have. But the job is not done yet.”
Kganyago admitted that at the current repo rate level, monetary policy was restrictive, consistent with elevated inflation expectations and the inflation outlook.
Sanlam Investments chief economist Arthur Kamp said the bank had left the door ajar should it need to hike again.
Kamp said progress from where inflation was currently sitting was likely to be slower as risks were skewed to the upside, pointing to numerous potential sources of renewed inflation pressure.
“For now, though, based on the current inflation forecast, there seems to be enough reason to believe that we have seen the peak of the interest rate hiking cycle,” Kamp said.
“However, arguably, in the current environment of virtually no real GDP growth and soft real credit extension it is probably better to guide inflation back towards the inflation target over a longer period than usual, as opposed to risking excessive damage to the economy by trying to reach the target quickly.”
North West University's Business School economist Prof Raymond Parsons said the overall message of MPC’s decision must be interpreted as a ‘hawkish pause’, being coupled with warnings about possible further interest rate hikes.
“Interest rates may not yet have peaked. The divided MPC vote reflects the possibilities,” Parsons said.
“These remain future decisions of timing and judgement as new data emerges over the next few months.”
Meanwhile, the bank also revised its economic growth forecast for 2023 slightly higher at 0.4% from 0.3%, saying energy and logistical constraints remained binding on the growth outlook, limiting economic activity and increasing costs.
For 2024 and 2025, the Sarb said gross domestic product (GDP) forecasts remained unchanged at 1.0% and 1.1%, respectively.
“While households and firms exhibit resilience, economic growth has been volatile for some time and highly sensitive to new shocks,” Kganyago said.
“An improvement in logistics and a sustained reduction in load-shedding, or greater energy supply from alternative sources, would significantly increase growth.”