Reserve Bank holds firm on interest rates despite lingering inflation concerns

South Africa’s central bank maintains its benchmark interest rate at 8.25%, signalling an ongoing battle against persistent inflation. Governor Lesetja Kganyago asserts the current rate is restrictive, reflecting concerns about rising inflation expectations. The decision, unanimous for the fourth consecutive meeting, precedes the country’s upcoming elections. Critics argue for rate cuts to aid a struggling economy and high unemployment. The bank forecasts 1.2% growth in 2024, citing challenges like port and rail disruptions. Despite easing inflation in December, the bank remains vigilant, emphasising sustained declines before policy adjustments.

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By Ntando Thukwana and S’thembile Cele

South Africa’s central bank held its benchmark interest rate at a 2009 high, while signaling that its fight to quash inflation is not yet done.

The monetary policy committee maintained the rate at 8.25% for a fourth consecutive meeting, Governor Lesetja Kganyago said at a briefing north of Johannesburg on Thursday. That matched the median estimate of 19 economists in a Bloomberg survey.

“At the current repurchase rate level, policy is restrictive, consistent with the inflation outlook and the need to address rising inflation expectations,” Kganyago said. “Serious upside risks to the inflation trajectory from global and domestic sources are evident.”

David Fowkes, an adviser to the governors, was named as a member of the MPC on Thursday. All five of the panel’s members voted to hold in their first meeting since the departure of Deputy Governor Kuben Naidoo, who announced his resignation in October. It is the second meeting in a row that the decision was unanimous. 

The panel first paused in July, after tightening policy by 475 basis points in a rate-hike campaign that began in November 2021 to confront mounting price pressures.

The rand erased a decline and traded little changed at 18.8911 per dollar by 3:17 p.m. in Johannesburg.

The implied policy rate path of the central bank’s quarterly projection model now shows the repurchase rate at 7.54% by the end of 2024, compared with 7.55% at the previous MPC meeting.

Annual price growth softened more than anticipated in December to 5.1% from 5.5% a month earlier on easing transport and food costs. The bank, which prefers to anchor inflation expectations at the midpoint of its 3% to 6% target range, sees inflation averaging 5% this year and 4.6% in 2025.

“There isn’t a discernible trend that shows that inflation is declining towards our target,” Kganyago said. “For as long as there isn’t any sustained decline of inflation towards our target, and more importantly that inflation stays there in a sustained manner, don’t expect us to recalibrate policy.”

South Africa holds elections this year and the decision to keep borrowing costs at their current level is likely to draw fire from politicians and labor unions. Its critics say the central bank should be doing more to support an economy that’s barely growing and reduce an unemployment rate that’s among the highest in the world.

The Public Servants Association of South Africa earlier this week urged the MPC to cut rates to help indebted South Africans. Household debt as a percentage of nominal disposable income stood at 61.9% in the third quarter of 2023, according to central bank data.

The bank forecasts growth of 1.2% for this year, unchanged from its previous estimate, and 1.3% next year, with port and rail snarl-ups seen as a serious constraint. 

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