MPC keeps repo rate at 8.25% but warns of myriad risks to outlook

The SA Reserve Bank has kept the repo rate unchanged for a second meeting running, but retained a cautious tone in its statement as renewed risks to inflation from recent rand weakness and increased global fuel and food prices remain a concern.

The decision to keep the repo rate at 8.25% on Thursday was in line with the latest Reuters analyst consensus showing that 29 out of 30 analysts expected no change in the repo rate with only one forecasting a hike. The MPC decision was decided by a 3-2 split, with two members voting for a 25bps rise.

Before Reserve Bank governor Lesetja Kganyago’s speech on Thursday, the rand was 0.8% weaker at R19/$. Within a few minutes of the announcement it had recovered a little to R18.95/$.

The Bank revised its 2023 consumer inflation forecast slightly to 5.9% from 6% previously and May’s 6.2%. Headline inflation for 2024 is forecast to reach 5.1% from 5% in July before moderating to 4.5% in 2025, unchanged from the July meeting.

Core inflation, which excludes volatile food and energy prices is now expected to be 4.9% in 2023 from 5.2% in July (previously 5.3%). This is important because while core inflation has been inside the target for the past 26 months, it has remained above the midpoint of 4.5% for the past 10 months.

While warning again that load-shedding alone would deduct two percentage points from economic growth this year, the MPC now believes the SA economy will grow by 0.7% in 2023, compared to its previous forecasts of 0.4% in July and 0.3% in May.

The bank kept its GDP growth forecast for 2024 and 2025 unchanged from the previous meeting, at 1% and 1.1%.

The bank’s decision comes a day after the US’s federal open market committee, as expected, kept rates unchanged at a 22-year high of 5.25%-5.5% following a 25bps hike in July.

The US started its hiking cycle in March 2022, with increases coming at their fastest and most substantial rate in 40 years. This as the Fed tries to control inflation levels not seen since 1980.

Fed chair Jerome Powell said recent indicators suggest economic activity has been expanding at a solid pace, and so far this year, growth in real GDP has come in above expectations.

He said the Fed will cut rates by a smaller-than-expected margin in 2024, a comment which surprised markets, triggering strong flows into the dollar which saw the benchmark US 10-year treasury yield race to a 15-year high.