Monetary Policy Committee announcement: An overview

In line with predictions, South African Reserve Bank (SARB) governor, Lesetja Kganyago, confirmed on Thursday afternoon (25/01/2024) that the repurchase rate remains unchanged at 8.25% for the fourth time since May last year. This is the highest the repo rate has been in the country since 2008 when a global recession had a severe impact on the economy. This also means that the prime lending rate of local commercial banks remains unchanged at 11.75%.

While recent CPI figures of 5.1% were within the bank’s target of between 3 to 6%, inflation remained unpredictable and will support a continued hawkish policy stance by the Monetary Policy Committee (MPC) in the coming months. 

Global economic uncertainty and high core inflation

Delving a bit deeper into the press statement issued by the SARB, it highlights the global economic uncertainty at the beginning of the new year and notes mixed conditions with easing headline inflation, but persistently high core inflation in many countries. Both advanced and emerging economies are expected to see modest growth, but challenges such as geopolitical tensions and climate change threaten supply chains and output, coupled with an uncertain economic outlook and the need to address rising inflation expectations. 

Future decisions will be data-dependent, aiming to guide inflation expectations towards the midpoint target band to improve the economic outlook and reduce borrowing costs. The statement also emphasises the importance of prudent public debt management, energy supply increase, and keeping administered price inflation low to strengthen monetary policy effectiveness. 

In South Africa itself, the GDP growth for the third quarter of 2023 was weaker than expected, mainly due to constraints in ports, rail and electricity supply. Annual consumer price inflation decreased in December 2023, easing from 5.5 to 5.1% in November and 5.9% in October, while the consumer price index was unchanged in December compared to November. 

The inflation rate for 2023 was 6% – much lower than 2022’s 6.9%, after being relatively high in the first five months of the year, with the headline rate consistently above 6%. Inflation eased below this level for the remaining seven months of the year. The highest inflation reading in 2023 was 7.1% in March and the lowest was 4.7% recorded in July. 

Interest-rate cuts on the cards

The forecast for global growth in 2024 is further relatively weak at 2.6%. Despite some improvement in the fourth quarter of 2023, household consumption and investment have eased while government spending has been sustained. 

Commodity export prices have also decreased significantly, impacting foreign demand growth and the current account deficit is projected to increase, driven by lower export prices. The rand has further depreciated against the US dollar, fuelling inflationary pressures while fuel and food price inflation is expected to remain moderate. Looking ahead, easing global price pressures combined with the underlying weakness in domestic demand should support the commencement of a shallow interest-rate cutting cycle in South Africa towards the middle of 2024, which will be a welcome sight.