MPC slows the pace of monetary policy tightening

Author: Patrick Buthelezi, Economist at Sanlam Investments

The Monetary Policy Committee (MPC) raised the interest rate, albeit the pace of tightening slowed to 25 basis points following three consecutive aggressive hikes of 75 basis points. This is consistent with observed global developments. SARB increased the policy rate for eight succussive meetings since November 2021.  Consequently, the repo rate reached 7.25%, marking the highest level since 2009. The committee was split on the decision; three members voted for 25 basis points, while two preferred 50 basis points.

The bank revised economic growth forecast sharply lower to 0.3% in 2023 due to intensified and uncertain load-shedding outlook. The Bank estimate that electricity outages would shave about 2.0% to GDP growth in 2023 compared to a previous moderate estimate of 0.6%. Also, the bank lowered real GDP forecast to 0.7% in 2024 and 1.0% in 2025. The bank sees the risk to economic growth as balanced.

Regarding prices, the SARB kept its inflation forecast unchanged at 5.4% in 2023 while raising it slightly to 4.8% in 2024 and maintained 4.5% in 2025.  Core inflation was revised slightly lower to 5.2% compared to the previous estimate of 5.5% in 2023 and 4.7% compared to the previous estimate of 4.8% in 2024. The SARB maintained core inflation at 4.5% in 2025. Headline inflation is expected to return within the target band in 2Q2023 and be sustained around the midpoint in 4Q2024.  The bank assessed the risk to the inflation outlook to be on the upside owing to uncertainty regarding the impact of load-shedding on business costs, potential weak exchange rate, and volatile commodity prices.

Overall, the interest rate hiking cycle is probably peaking, given 375 cumulative rate hikes, which is moving into restrictive territory. However, this hinges on headline inflation returning sustainably within the target range of 3-6%. Furthermore, the United States interest rate cycle matters since South Africa is a small open economy prone to shocks.