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Following the assessment of economic risks and global markets, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) has kept the repurchase rate unchanged at 7%.
According to the SARB Governor, Lesetja Kganyago, the global economy is positive, it has proven to be resilient over the period under review and volatility in markets have subsided and showing signs of growth at a steady pace. However, geopolitical tensions are still rife and disruptive towards trade.
Kganyago said policy rates have been cut in the United States and the United Kingdom, and the dollar has weakened. Various commodity prices have risen, although oil prices remain contained. He said these conditions are supportive for emerging markets like South Africa.
“However, while the cyclical factors mean global conditions are currently favourable, there are also more adverse structural developments, which are likely to prove challenging. Long-term interest rates have shifted higher in several major economies. This reflects a range of pressures, especially high and rising debt levels, as well as inflation risks,” said the Governor.
South Africa’s economy is also doing well given the global conditions; though there is much momentum to be gained especially in the area of affordability, the current performance by the economy is impressive.
“Turning to South Africa, at our last meeting we noted positive indicators for second-quarter output. Last week’s GDP release still surprised on the upside, with the highest quarterly growth rate in two years. We have therefore marked up our growth forecast for the year, from 0.9% to 1.2%. This is despite a weaker export outlook, given higher tariffs.
Although the strong GDP report was welcome, we do not want to overstate the importance of one good quarter. We continue to see modest output gains over the next few years, helped by structural reforms. There are also some cyclical indicators, such as credit extension, which look positive. However, reaching a healthy growth rate will require much higher investment levels than we are achieving now,” said Lesetja Kganyago.
The rising inflation is undermining the rebounding economy of South Africa, which will force citizens to dig deeper into their pockets. Kganyago said overall, SARB expects headline inflation to average at 3.4% this year, and 3.6% next year, before reverting to 3% during 2027.
“Against this backdrop, the MPC decided to keep the policy rate unchanged, at 7%. Four members preferred to keep rates on hold, while two favoured a cut of 25 basis points. Since September last year, we have reduced rates by 125 basis points, and we want to see how this is affecting the economy, how expectations evolve, and how inflation risks are resolved.
The forecast has rates easing gradually as inflation returns to the bottom end of the 3-6% target range. The MPC emphasises that stabilising inflation at 3%, rather than 4.5%, implies a lower longer-term level for the policy rate. That said, the rate path from the Quarterly Projection Model remains a broad policy guide. As usual, our decisions will be taken on a meeting-by-meeting basis, with careful attention to the outlook, data outcomes, and the balance of risks to the forecast,” said Governor Lesetja Kganyago.
