The South African Reserve Bank (SARB) surprised markets on Thursday by keeping its benchmark repo rate unchanged at 7%, despite mounting inflationary pressures fuelled by higher petrol and diesel prices.
The central bank said its current monetary policy stance remains appropriate following the 25-basis-point increase implemented at its previous Monetary Policy Committee (MPC) meeting in May.
Addressing a media briefing after the MPC’s fourth meeting of the year, Governor Lesetja Kganyago said the inflation outlook had improved marginally, but price pressures remained above desired levels while economic growth continued to disappoint.
“The inflation outlook has improved slightly since our last meeting, but inflation is still too high, while growth is weak,” Kganyago said.
The decision was split, with four MPC members supporting a pause in interest rates and two voting in favour of another 25-basis-point increase.
The outcome differed from market expectations, as economists surveyed by Reuters and Bloomberg had largely predicted another rate hike.
The announcement followed Statistics South Africa’s release of June inflation data on Wednesday, which showed consumer inflation accelerated to 5% — its highest level in two years.
The increase was largely driven by higher transport costs as fuel prices remained elevated amid the ongoing conflict between the United States and Iran.
As a country that imports most of its oil and petroleum products, South Africa has been particularly vulnerable to volatility in global energy markets since the conflict erupted in late February.
The retail price of 95-octane petrol in Gauteng has climbed by almost 29% since March to R26.10 a litre, while the wholesale price of diesel has surged by nearly 34% to R24.79 a litre, although it has retreated from its May peak of R31.18.
Despite recent inflationary pressures, the Reserve Bank warned that upside risks to inflation remain.
The central bank expects headline inflation to remain above 4% until early next year, keeping it outside the upper limit of its preferred 2% to 4% target range around the 3% midpoint.
Kganyago said the latest inflation readings were largely the result of rising fuel costs rather than widespread price increases across the economy.
He noted that, excluding fuel, the prices of most goods had remained relatively stable.
The governor added that the rand had held up well, remaining close to where it started the year against the US dollar while strengthening against the euro, helping to limit imported inflation.
He also said food inflation had eased, supported by strong agricultural harvests and the fading effects of the foot-and-mouth disease outbreak.
However, Kganyago cautioned that El Niño could affect food production next year, although the risk has not yet been incorporated into the Bank’s baseline forecasts.
Turning to the economy, he said growth is expected to weaken during the second and third quarters after gross domestic product expanded by a better-than-expected 0.5% in the first quarter.
Kganyago said continued domestic reforms and improving global conditions could place the economy back on a stronger growth trajectory.
He nevertheless warned that the economic outlook remains uncertain, with downside risks continuing to weigh on growth prospects.
“Our baseline forecast is that the economy starts to recover in the second half of this year, as the shock fades. But the outlook is uncertain. We see downside risks to growth,” Kganyago said.
