South Africa Holds Rates Again as Inflation Risks Persist

South Africa’s central bank kept its benchmark interest rate unchanged, while signaling that borrowing costs are likely to stay higher for longer because of persistent inflation risks.

(Bloomberg) — South Africa’s central bank kept its benchmark interest rate unchanged, while signaling that borrowing costs are likely to stay higher for longer because of persistent inflation risks. 

The monetary policy committee maintained the rate at a 14-year high of 8.25% for a second consecutive meeting, Governor Lesetja Kganyago said at a briefing north of Johannesburg on Thursday. That matched the median estimate of 26 economists in a Bloomberg survey.  

“The job of tackling inflation is not yet done,” Kganyago said. “Risks remain. Should we see them materialize, we stand ready to act.”

Read More: South African Reserve Bank Interest Rate Statement Side-by-Side

The inaction on rates was backed by three of the MPC’s members and the other two preferred a 25 basis-point increase. Prior to holding borrowing costs in July, the central bank raised them at 10 previous meetings, bringing the cumulative increase to 475 basis points since November 2021. 

The governor urged the government to help combat inflation by exercising more fiscal restraint — which could entail spending curbs and granting state workers pay increases that were in line with productivity gains. It should become clearer whether his call is being heeded when Finance Minister Enoch Godongwana delivers his budget update on Nov. 1.

“The messaging was fiscal, fiscal and fiscal, and investors’ demand for higher risk premia possibly constraining when and by how much the South African Reserve Bank is prepared to ease,” Razia Khan, chief economist Africa and Middle East at Standard Chartered Bank, said in emailed comments. “Fiscal revenue has disappointed, state-owned entity risks are still in place, and the African National Congress government has an electoral majority to try to win in 2024.”

The rand remained weaker and was down 0.2% to 18.8709 per dollar by 4:33 p.m. in Johannesburg. Yields on benchmark government debt rose nine basis points from Wednesday’s close to 12.17%.

Forward-rate agreements, used to speculate on borrowing costs in 12 months time, were pricing in an 72% chance of a 25 basis-point interest rate cut after the rate decision. That compares with expectations of a 50 basis-point rate cut that was fully priced in at the start of September.

“Interest rates should remain at current levels over the next few quarters before a shallow cutting cycle is probable, which will likely leave rates above pre-pandemic levels,” said FNB Chief Economist Mamello Matikinca-Ngwenya. She sees higher global funding costs and risk sentiment weighing on the rand and that, together with higher oil prices, will push up transportation costs and imported inflation. 

The central bank prefers to anchor inflation expectations close to the midpoint of its 3% to 6% target range. Annual inflation in August quickened for the first time in five months to 4.8% from 4.7% in July, signaling that price pressures are still lingering.

“There is no virtue in high inflation,” Kganyago said. “High inflation begets high interest rates and the cries of South Africans over the years has been that inflation is eroding our incomes.”

Thursday’s decision may offer some relief to the moribund economy that the central bank now expects to grow 0.7% this year — marginally higher than its previous forecast of 0.4% — and to households that are battling to make ends meet because of high interest rates and inflation. 

Retail sales fell for an eighth straight month in July, dropping 1.8% from a year earlier, and household consumption spending that accounts for about two-thirds of gross domestic product fell 0.3% in the second quarter, its biggest decline since the three months through September 2021.

Kganyago denied there was a risk of the central bank’s policy actions dragging the country into recession. The bank can’t do much to bolster the economy and the government needs to unblock structural barriers to growth, including fixing the state power utility that’s subjected the country to daily blackouts, he said.

–With assistance from Simbarashe Gumbo, Colleen Goko and Paul Richardson.

(Updates with economist comment starting in fourth paragraph.)

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