SARB keeps interest rates unchanged

As expected, the SA Reserve Bank's monetary policy committee (MPC) yesterday left interest rates unchanged at the highest level in 15 years.

For the seventh straight meeting, the repo rate was kept at 8.25%.

Four members of the MPC voted to keep rates unchanged, but two voted for a cut of 25 basis points.

Lesetja Kganyago, governor of the South African Reserve Bank, said the two members argued that inflation has cooled enough to warrant a cut.

Inflation

Kganyago said the outlook for inflation has improved "somewhat".

The MPC now expects headline consumer price inflation of 4.9% for the year, compared to its previous forecast of 5.1%.

"Over the next few quarters, headline inflation is expected to dip below the 4.5% midpoint, mainly because of fuel and food prices. This outlook is supported by the stronger rand," Kganyago said.

The MPC has been adamant that local rates won't be lowered before inflation moves closer to its 4.5% target level – from 5.2% currently.

Expectations

In addition, it has expressed concern about inflation expectations, as reflected by a survey of analysts, companies, labour unions and households.

Expectations about future inflation play a key role in driving inflation.

When workers expect inflation to remain high, they demand higher wage hikes – which in turn drive prices higher, as companies must recoup higher labour costs.

Kganyago said that the latest survey results show average expectations at 5% next year and 4.9% two years ahead, still "uncomfortably" above 4.5% - however, he noted that all categories of respondents lowered their inflation expectations from the previous survey.

"We remain concerned about administered prices. We have had to mark up electricity inflation for this forecast round, even as other categories shifted lower."

The MPC is also not expected to cut rates before the US central bank makes a move. The market is now pricing in a first US cut in September.

US

But Kganyago warned that rates in the US may stay higher for even longer than markets currently anticipate.

"This presents risks to the currency outlook."

Higher US rates are negative for the rand and other emerging market currencies, whose yields would look less attractive in comparison.

He expressed concern about South Africa's "disappointing" economic performance in the first half of the year.

The MPC has downgraded its growth forecast for the second quarter from 0.7% to 0.6% after recent weak mining and manufacturing numbers. The economy shrank by 0.1% in the first quarter.

"Over the medium term, we expect somewhat faster growth, supported by a more reliable electricity supply and improving logistics."

The next decision on interest rates will be made on 19 September 2024. - Fin24