The South African Reserve Bank (SARB) decided to keep the repo rate at 7%, while the lending rate stands at 10.5%. This decision was made by the Monetary Policy Committee (MPC) on Thursday.
The MPC, which held a meeting on Thursday, stated in a release from SARB Governor Lesetjo Kganyago that various scenarios regarding inflation expectations and fuel prices were analyzed before making the decision.
This decision followed the South African Statistics Agency (Stats SA) reporting on Wednesday that annual consumer inflation accelerated to 5% in June, higher than the 4.5% recorded in May and exceeding market expectations of 4.7%.
Regarding South Africa's economic growth, the MPC noted that first-quarter growth was stronger than forecasts, approaching 2% year-on-year. However, this growth was driven by an increase in net exports rather than domestic demand.
The Committee forecasts a slowdown in growth during the second and third quarters of the current year. It highlighted a sharp decline in consumer confidence and weakening business confidence. According to sectoral surveys, there is a general decrease in activity since the start of the war. Furthermore, export prices have fallen, although trade conditions have improved due to lower import prices.
The MPC added that while there was good momentum at the beginning of the year, households were affected by rising fuel prices, and uncertainty negatively impacted investments. The baseline forecast is that the economy will begin to recover in the second half of the year as the shock subsides, although the overall outlook remains uncertain.
On the issue of inflation, the committee reported that according to the latest survey by the Bureau of Economic Research, inflation expectations have risen, with short-term changes being more significant than long-term ones. All surveyed groups expected inflation to rise, with the largest change recorded among trade unions. Market expectations for the break-even point softened from May but remain higher than at the beginning of the year, and there is a risk of increased inflation.
In the vote, four members favored maintaining the rate, while two advocated for a 25 basis point increase. The Committee agreed that the situation is uncertain and believes that the current policy, considering the previous rate hike, is appropriate, as rates remain somewhat restrictive.
Tys van Zyl, CEO of Everest Advisory Services, a financial service provider, suggested that this decision reflects the Reserve Bank's view that current inflationary pressure is primarily caused by external factors. He noted that the recent rise in inflation is largely linked to external reasons, such as rising fuel prices and the subsequent impact on transport costs and the price of other goods and services.
According to Van Zyl, in this environment, raising interest rates might only have a limited impact on current inflationary pressure while simultaneously placing additional strain on an already struggling economy. He also emphasized that this decision will bring welcome relief to many South Africans, allowing financially strained households to stabilize their positions without increasing debt payments, and providing businesses with greater confidence when making investment and expansion decisions.
The European Central Bank (ECB) decided to keep interest rates without making any changes.
