By Lehlohonolo Lehana.
The SA Reserve Bank has kept the repo rate unchanged for a second meeting running, but retained a cautious tone in its statement as renewed risks to inflation from recent rand weakness and increased global fuel and food prices remained a concern.
The decision to keep interest rates on hold wasn’t unanimous, with two members of the MPC voting to hike the interest rate.
While consumers will be relieved that their loans won’t cost them more, there’s still a chance that the MPC will raise rates at its November meeting.
Reserve Bank governor Lesetja Kganyago noted that headline inflation has been coming down over the past few months, but acknowledged the slight rise announced by Stats SA on Wednesday, saying that its future trajectory is less certain.
Inflation in August ticked slightly higher to 4.8%, up a fraction from 4.7% in July.
He also noted that global market conditions are also tight, increasing the cost of financing and that this situation is likely to persist.
Other local pressures also exist – such as the ongoing power outages.
“Despite considerable reprieve in the winter months, South Africa’s electricity load shedding has increased, and prices for commodity exports continue to weaken. In the near term, stronger El Niño conditions threaten the agricultural outlook, while global climatic events present additional risks,” he said.
“Energy and logistical constraints remain binding on the growth outlook, limiting economic activity and increasing costs.”
Inflation has been coming down, but core inflation remains relatively high – and expectations from major sectors are that the battle against inflation is still very present.
“Indications are the fight against inflation is not yet done,” Kganyago said. “Load shedding and logistics constraints may also have broader effects on the cost of doing business and the cost of living. Given uncertain fuel and food price inflation, considerable risk still attaches to the forecast for average salaries.”
While the Bureau for Economic Research’s inflation expectations survey showed a slight drop to 6.1%, Kganyago said the committee would feel more comfortable with this being rooted in the middle of the target range of 3% to 6%.
Therefore, while interest rates are being held, the risks are still there, he said. “Risks to the inflation outlook are assessed to the upside.”
Looking ahead, Kganyago said that the central bank’s policy stance will look at inflation over a longer term, aiming for a more sustained level at the middle of its target range.
“The MPC will seek to look through temporary price shocks and focus on potential second round effects and the risks of de-anchoring inflation expectations.