South Africa’s interest rates to stay the same

The Monetary Policy Committee (MPC) voted to keep interest rates unchanged again – making this the sixth consecutive meeting where rates have remained the same.

This decision means the repo rate will remain at 8.25% while the prime lending rate stands at 11.75%.

The decision was unanimous, as all members of the MPC preferred to keep the rate on hold.

SARB Governor Lesetja Kganyago said uncertainty is unusually elevated at the moment.

He said that while the MPC assesses the inflation forecast risks to be broadly balanced at present, high inflation expectations require that the committee delivers on its target sooner rather than later to re-anchor expectations.

“The Committee remains concerned that inflation expectations are elevated. After three years of inflation being above 4.5%, few survey respondents, especially from businesses and trade unions, now believe that inflation will be at 4.5% in two years’ time,” Kganyago said.

The decision to pause comes after months of effort to bring inflation under control and within the South African Reserve Bank’s (SARB) target range of 3% to 6% since the hiking cycle started in November 2021.

The MPC has hiked interest rates by a cumulative 475 basis points since the start of the hiking cycle.

Their efforts started showing results by mid-2023, with inflation dipping to a two-year low in June. 

While inflation rose at the start of this year, it has since been on a downward trend, with the latest reading showing CPI at 5.2% in April.

Today’s decision by the MPC to pause aligns with most experts’ predictions, who forecasted higher for longer interest rates and believe a cut will likely only come in the second half of this year. 

However, Kganyago has repeatedly said the MPC would like to see inflation come down sustainably and be anchored around the mid-point of the target range – 4.5% – before they will consider cutting rates.

“Although the MPC assesses the inflation forecast risks to be broadly balanced at present, high inflation expectations require that we deliver on our target sooner rather than later to re-anchor expectations,” the Governor said in his statement today.

“Decisions of the MPC will continue to be data dependent and sensitive to the balance of risks to the outlook. We are committed to stabilising inflation at the mid-point of the target band. Achieving this outcome will improve the economic outlook and reduce borrowing costs.”

Many experts believe this will only occur in the latter half of 2024 and is largely dependent on when the US Federal Reserve enters its cutting cycle.

Kganyago said today that the MPC sees inflation stabilising at the 4.5% objective in the second quarter of next year.

This is an improvement from its March forecast, which only projected inflation to reach this milestone at the end of 2025.

However, the Governor said the changes to the outlook are not large when compared to its March forecast, as average inflation for 2025 is only a tenth of a percentage point lower.

“The task of achieving our inflation objective is not yet done,” Kganyago said.

“The change in our inflation forecast mostly reflects recent data outcomes, with the CPI releases for March and April turning out slightly better than expected. We have revised down our 2024 food and core forecasts marginally.”

“Fuel price inflation is now expected to be higher, in the near-term, but it improves for 2025. This helps our forecast get to the target midpoint sooner.”

The graph below shows South Africa’s CPI and repo rate movement since May 2021.