SARB Holds Key Rate at 8.25% at Third Straight MPC
Bottom Line: As expected, SARB kept rates unchanged at 8.25% at MPC on November 23, which was the last MPC meeting of the year. According to press statement released, SARB remained worried about inflation risks since the upward trend in CPI continued in October as it hit 5.9% due to higher fuel, health, transport and food prices.We suspect that SARB will continue to wait and see, given that the lagged impact of the tightening cycle is still feeding through.
Figure 1: CPI Inflation Rate, October 2021 – October 2023
Source: Datastream
Under surging inflationary concerns, SARB decided to keep the repo rate at 8.25% on November 23 MPC. While the hold was widely expected, high inflation numbers on November 22 did raise some eyebrows. Despite this, it appears the vote to hold interest rates was unanimous with all committee members agreeing to hold the policy rate steady.
Remaining hawkish in tone, the MPC press statement demonstrated that SARB seemed worried about inflation risks as CPI continued to surge in October with 5.9% due to higher fuel, health, transport and food prices. (Figure 1). Inflation for food and non-alcoholic beverages accelerated for a second consecutive month, rising to 8.7% in October from 8.1% in September. The fuel price index surged for a third consecutive month, rising 6.5% between September and October. Transport inflation quickened to 7.4% from 4.2% in September, which was also notable and closely linked with the jump in the fuel prices (here).
Reserve Bank governor Kganyago said that while economic uncertainty persists in South Africa – and risks are to the upside – the current interest rate levels remain restrictive and are consistent with the inflation outlook. The governor added that “South Africa's headline inflation rate has increased more gradually than in many other emerging and advanced economies but still remains sensitive to shocks. (…) Headline inflation is likely to end the year at 5.8%, revised down from 5.9% at the last meeting, and should average 5.0% in 2024 and stabilise at 4.5% in 2025 and 2026. The committee remains vigilant and stands ready to act should risks begin to materialise.”
Despite the worrying inflationary outlook, coupled with persistent headwinds of power cuts (loadshedding) and logistical constraints, which generally increase costs, the economy was partly relieved in October thanks to the recent fall in the frequency and intensity of electricity loadshedding, which partly alleviated risks on the cost of doing business and the cost of living.Meanwhile, the pace of the weakening of rand (ZAR) relatively slowed down in October.
In addition to this, the trade surplus was on an upward pattern in October, which has been great news for the country. The preliminary figures by the SA Revenue Services (SARS) showed that the trade surplus widened to ZAR13.1bn in September, from a downwardly revised ZAR12.6bn in August as the exports decreased by 3.3% MoM (led by reduced shipments of mineral products) while imports fell by 3.8% MoM due to lower acquisitions of vehicle and transport equipment. We think the better-than-expected trade balance is encouraging, but it is likely to remain under pressure due to challenges, including lower commodity prices as well as domestic logistical and energy constraints.
We continue to foresee 2024 general elections may cause a burdensome on the already struggling budget and ignite some inflation as we expect populist spending to increase before the elections. In light of risks mentioned above, SARB would have to remain vigilant to act and sound hawkish should risks to the inflation outlook worsening, which can easily affect the fragile economy further in the remainder of 2023 and early 2024. Even so, as inflation comes in 2024, the SARB will likely pivot to rate cuts.