The Reserve Bank of South Africa has increased the repo rate by 25 basis points, less than expected, and the ongoing cargo shedding crisis is expected to deal a devastating blow to the country’s economic growth in 2023.
Two of the five members of the bank’s monetary policy committee (MPC) preferred a higher increase of 50 basis points, which would have been in line with consensus expectations.
But given the suppressive effect of high interest rates on the economy, the MPC’s final decision will come as a relief to consumers, who have been feeling the pressure of much higher borrowing costs compared to a year ago.
Following the announcement, Reserve Bank Governor Lesetja Kganyago said monetary policy is not in tight territory, adding that it continues to support economic growth.
The Reserve Bank, whose goal is price stability rather than jobs or growth, has come under fresh scrutiny recently after the ruling ANC once again made a resolution to change its mandate at the elective conference of the match.
Responding to the ANC resolution, Kganyago said the Reserve Bank did not wake up one day and decide to target price stability. “It’s because the people of this country decided that.”
“Balanced and sustainable growth,” the governor added, “cannot exist when inflation is spiraling out of control and eating away at our people’s income. High inflation is not a growth strategy… High inflation is not an employment strategy.”
The Reserve Bank has assessed risks to the inflation outlook on the upside, citing continued tightness in the oil market, significantly higher electricity prices, as well as load reduction, which, according to the MPC, could have broader price effects on the cost of doing business and living.
Inflation cooled for the second straight month in December to 7.2% yoy, marking the slowest annual increase since May 2022. The inflation figure was slightly better than expected, but still well above the 3% upper bound. to 6 from the Reserve Bank. % target reach.
December inflation also resulted in the 2022 average (6.9%) exceeding the 6.7% forecast by the Reserve Bank during its previous MPC meeting in November.
Responding to last week’s inflation report, Investec Chief Economist Annabel Bishop noted that prices are likely to trend downward through the first half of 2023 as weak global economic growth weighs on the demand. Investec forecasts that inflation will average 5.3% yoy in 2023.
Inflation has so far remained stagnant in South Africa and around the world, Bishop said, but measures of inflation are expected to fall (disinflate) more rapidly in the first half of this year. Domestic inflation is expected to reach the midpoint of the Reserve Bank’s target by mid-year.
The Reserve Bank’s headline inflation forecast for 2023 remains unchanged at 5.4%.
Fuel price inflation, which was the main driver of headline inflation in 2022, averaged 34.5% last year. It is forecast to fall to -2.7% in 2023 (below 0.7%). Reserve Bank core inflation, which excludes fuel and food prices, is forecast lower, albeit only slightly to 5.2% in 20223, compared to 5.5% previously.
However, electricity price inflation and food prices in 2023 have been revised upwards.
Local electricity price inflation is now expected to hit 12.9% in 2023, up from 10.7% in 2022.
Food price inflation is expected to be 7.3% in 2023, up from 6.2%. Local food inflation is expected to remain elevated, despite world prices continuing to decline, reflecting the lagged effect of the weak rand.
Meanwhile, the rand has weakened slightly compared to the time of the November meeting. However, the national currency is much stronger than in the two months leading up to that meeting, as the strength of the dollar has remained subdued amid fears of a US recession.
The implied starting point for the rand forecast is R16.92 per US dollar, compared to R17.68 at the time of the previous MPC meeting.
According to the latest Reserve Bank quarterly bulletin, published in December, the rand’s exchange value was suppressed by the negative effects of the increased incidence of cargo shedding in the third quarter and fourth quarter of 2022.
The rand weakened notably late last week and early this week amid news that load reduction would likely be a permanent feature for at least the next two years.
The MPC statement notes that while the better global outlook has increased appetite for riskier assets, the rand has been less buoyant than other currencies.
The burden reduction will weigh heavily on South Africa’s GDP in 2023, with the Reserve Bank forecasting growth of just 0.3% this year, down from the 1.1% forecast at the November meeting.
At the November meeting, the bank predicted that load shedding would cut 0.6 percentage points of growth in 2023. The bank now expects the economy to lose 2 percentage points of growth as a result of the ongoing energy crisis.
“In the medium term, the forecast takes into account the current high levels of load disconnection and more modest household spending and investment growth than before,” the MPC statement said on Thursday.
These factors, plus falling commodity prices, have caused the Reserve Bank to halve its 2024 growth forecast to 0.7%, up from 1.4% previously. The bank now expects the national economy to grow 1% in 2025, up from 1.5%.
