South Africa's central bank raised its primary interest rate (ZAREPO=ECI) on Thursday to a 14-year high, a move Governor Lesetja Kganyago described as "bitter medicine" needed to tame inflation. The bank lifted rates by 50 basis points to 8.25% as it raised its inflation forecasts for this year and next and said risks were to the upside. The decision was unanimously agreed by Monetary Policy Committee members and followed a 50 bps hike at the South African Reserve Bank's (SARB) last policy meeting in March. The rand hit a new all-time low against the dollar, down around 2% on the day, with one analyst saying some traders had bet on a more considerable 75 bps hike. The central bank of Africa's most industrialised economy is trying to bring inflation back within its target range of 3% to 6%.
Inflation fell more than expected to 6.8% year on year in April from 7.1% in March, but the SARB now expects 2023 inflation to average 6.2%, up from 6.0%. The bank now predicts that inflation will only be sustainable.
The Statement of the Monetary Policy Committee by Lesetja Kganyago, Governor of the South African Reserve Bank, discusses the economic conditions of South Africa, Asia and Europe, the United States, China, and the developing world. Sarb's forecast for global growth in 2023 and 2024 is revised to 2.4% (from 2.0%) and 2.7% (from 2.5%), respectively. The April World Economic Outlook of the International Monetary Fund (IMF) forecasts global growth at 2.8% and 3.0% for 2023 and 2024. Commodity export prices in USD fell by 0.9% in 2022, and South Africa's commodity export index is forecast to decline by 23.7% this year, a further 10.5% in 2024, and an additional 5.4% in 2025. Core inflation has eased in much of the world, but core inflation continues to rise, keeping consumer price inflation from falling more sharply.
Global financial markets will remain volatile, and policy rates will be elevated. The Bank’s forecast for GDP growth for 2023 is slightly higher than in March, at 0.3%. Energy and logistical constraints remain binding on South Africa’s growth outlook, limiting economic activity and increasing costs. Household spending is expected to grow modestly in real terms, in line with a positive but weak rise in real disposable income. Investment by the private sector remains positive, partly reflecting efforts to overcome constraints in energy and transport supply.
GDP growth forecasts for 2024 and 2025 are unchanged from the previous meeting, at 1% and 1.1%, respectively. Economic growth has been volatile for some time, and prospects for growth remain uncertain. An improvement in logistics and a sustained reduction in load shedding, or an increased energy supply from alternative sources, would significantly raise growth. The rand’s weakness provides short-term benefits to the tradable sector, while higher import prices and headline inflation create downside risks to change. Overall, domestic and global prospects appear highly sensitive to new shocks. At present, the risks to the medium-term domestic growth outlook are balanced.
The current growth forecast for South Africa leaves the output gap around zero over the next three years, implying modest positive pressures on inflation from the forecast growth rate. However, external financing needs are expected to rise, with falling export commodity prices and weaker growth in export volumes expected to increase the current account deficit to 2.5% of GDP this year before expanding it further to 3.1% and 3.6% of GDP, respectively, in 2024 and 2025. The risk premium charged on rand-denominated borrowing has increased sharply, with ten-year bond yields reaching 13.78% on the 23rd of May. The rand has weakened over the past year, with further sharp depreciation recently. Currency markets are expected to remain volatile and sensitive to idiosyncratic shocks.
At the global level, consumer price inflation in 2023 is forecast to be 7.0%, compared to 8.7% in 2022. In the G3 economies, despite an easing in headline inflation, price pressures remain evident in measures of core inflation, services and wages. The rise in South Africa’s headline inflation rate has been shaped primarily by The MPC has decided to increase the repurchase rate by 50 basis points to 8.25% per year, effective from the 26th of May 2023. Core inflation is revised to 5.3% in 2023, 5% (from 4.8%) and 4.6% (from 4.5%) in 2024 and 2025, respectively. Services price inflation is expected to come at 4.9%, unchanged from the previous meeting.
Core goods inflation is higher this year at 6.3%, and growth in average salaries and unit labour costs is higher in 2023 and 2024 and slightly lower in 2025. Headline inflation for 2023 is revised to 6.2%, and headline inflation for 2024 also increases to 5.1% before moderating to 4.5% in 2025. Risks to the inflation outlook are assessed to the upside. Global oil markets are expected to remain tight, with upside risk to prices. Domestic food price inflation continues to be elevated, and the risk of drier weather conditions in coming months has increased.
Load shedding may also have broader price effects on the cost of doing business and living. Average interest rate levels in major economies are higher than were projected in March. The current repurchase rate is restrictive, consistent with elevated inflation and risks. The policy stance aims to anchor inflation expectations more firmly around the mid-point of the target band and increase confidence in attaining the inflation target sustainably over time. To achieve this, the QPM remains a comprehensive policy guide, changing from meeting to meeting in response to new data and risks.
Economic and financial conditions are expected to remain more volatile for the foreseeable future, and monetary policy decisions will continue to be data-dependent and sensitive to the balance of risks to the outlook. The MPC will seek to look through temporary price shocks and focus on potential second-round effects and the chances of de-anchoring inflation expectations. The Bank will continue to monitor funding markets for stress closely.
