Reserve Bank had good reasons to keep the repo rate steady

Given the sticky inflation, consumers will have to wait a little longer to get relief from interest rate cuts

Headline consumer price inflation (CPI) for October surprised to the upside, jumping to 5.9% year on year, up from 5.4% in September and higher than the market expectation of 5.6%.

This rise in CPI was driven by food and nonalcoholic beverages, housing and utilities, and transport costs. CPI rose by 0.9% between September and October. Core inflation, which strips out the volatile food and nonalcoholic beverages, fuel and energy categories, moderated to 4.4% in October from 4.5% the previous month; however, the market expectation was 4.2%.

Despite this upside surprise in both headline and core CPI, the Reserve Bank unanimously kept the repo rate at 8.25% at this week’s monetary policy committee (MPC) meeting, the last sitting this year. This decision comes on the back of a marginal improvement in the CPI forecast for 2023 and 2024, now expected to average 5.8% and 5.1% respectively, after initial forecasts of 5.9% and 5%.

Inflation for 2025 is expected to average 4.5%, the midpoint of the Bank’s 3%-6% target band. There has been a marginal improvement in the outlook for core inflation too, to 4.8% and 4.6% in 2023 and 2024 from 4.9% and 4.7% previously. Core inflation is expected to converge to the midpoint of 4.5% in 2025 and 2026.

The Bank also revised its growth forecast marginally higher and its output gap narrower for 2023 and 2024. The latter should help reduce the funding needs and therefore the pace of currency weakness. In fact, the output gap fully closes this year onwards. The model-generated repo rate path suggests that all else being constant, the Bank would reduce the repo rate from the current 8.25% to 7.3% by the end of 2026, which is nearly one percentage point, with a 75 basis point reduction coming in 2024 and the remaining 25 basis points between 2025 and 2026.

As is usual, the Bank emphasised that it does not outsource MPC decisions to models but takes its outputs as input alongside other information that cannot be captured in models. It also highlighted upside risks to inflation, which, if they materialise, can change this expected interest rate path.

Given the sticky inflation, consumers will have to wait a little longer to get relief from interest rate cuts. That said, 2024 is shaping up for a far better ending than how it will start, and better than the beginning and end of this year.

Economic growth has surprised on the upside this year, largely because the impact of load-shedding on the economy has been less negative than before. The response from companies and households to changes in energy regulations helped the economy to be more resilient to load-shedding. This resilience will likely continue, which should provide an uplift to economic growth compared to current expectations.

There is, however, a hesitation to update economic growth forecasts to reflect this improvement on the energy front due to the potential for the 2024 elections to produce unstable coalitions that might undo economic reforms. This is not just South African analysts’ pessimism, it’s a concern that is shared by international investors and domestic investors and corporates alike.

For investors, the run-up to the election will be both interesting and boring. Interesting from the perspective that election polling data will likely see swings in expectations. Boring in the sense that few will want to make big investment decisions before the election. Monetary policy will also be likely boring in that we will not get much change in language or forecasts until the Bank starts cutting rates. That’s usual, provided all things remain unchanged, which they so often do not.

There are global factors to contend with: the US Federal Reserve and European Central Bank interest rate decisions; China’s fiscal policy stimulus; the war in Ukraine and the Hamas-Israel conflict; and other unknown unknowns.