Reserve Bank lifts repo rate by 25 basis points in the wake of load-shedding’s economic hit

The South African Reserve Bank has hiked the repo rate by a less-than-forecast 25 basis points, with the ongoing load-shedding crisis expected to deal a devastating blow to the country’s economic growth in 2023.

Two of the bank’s five monetary policy committee (MPC) members preferred a higher 50 basis point hike, which would have been in line with consensus expectations.

But given the suppressing effect of elevated interest rates on the economy, the MPC’s ultimate decision will come as a relief to consumers, who have felt the pinch of the much higher costs of borrowing compared to a year ago.

Following the announcement, Reserve Bank Governor Lesetja Kganyago said monetary policy is not in restrictive territory, adding that it remains supportive of economic growth. 

The Reserve Bank, which targets price stability rather than employment or growth, has come under renewed scrutiny recently after the governing ANC once again took a resolution to change its mandate at the party’s elective conference.

Responding to the ANC’s resolution, Kganyago said the Reserve Bank did not wake up one day and decide to target price stability. “It is because the people of this country decided that.”

“Balanced and sustainable growth,” the governor added, “cannot be when inflation is running amok and eating the incomes of our people. High inflation is not a growth strategy … High inflation is not an employment strategy.” 

The Reserve Bank has assessed risks to the inflation outlook to the upside, citing continued tightness in the oil market, significantly higher electricity prices as well as load-shedding — which the MPC said might have broader price effects on the cost of doing business and of living.

Inflation cooled for a second consecutive month in December to 7.2% year-on-year, marking the slowest annual increase since May 2022. The inflation print was slightly better than expected but still well above the upper limit of the Reserve Bank’s 3% to 6% target range. 

December inflation also resulted in the 2022 average (6.9%) coming in above the 6.7% the Reserve Bank forecast during its previous MPC meeting in November.

Responding to the inflation print last week, Investec chief economist Annabel Bishop noted that prices are likely to see a downward trend over the first half of 2023, as weak global economic growth weighs on demand. Investec forecasts that inflation will average 5.3% year-on-year in 2023. 

Inflation has been sticky so far in South Africa and globally, Bishop said, but the first half of this year is expected to see inflation measures fall (disinflation) more rapidly. Domestic inflation is expected to reach the midpoint of the Reserve Bank’s target around mid-year.

The Reserve Bank’s 2023 headline inflation forecast is unchanged at 5.4%.

Fuel price inflation, which was the major driver of headline inflation in 2022, averaged 34.5% last year. It is forecast to fall to -2.7% in 2023 (down from 0.7%). The Reserve Bank’s core inflation — which excludes fuel and food prices — forecast is down, though only somewhat at 5.2% in 20223, compared to 5.5% previously.

Electricity price and food price inflation in 2023 have, however, been revised higher. 

Local electricity price inflation is now expected to come in at 12.9% in 2023, compared with 10.7% in 2022. 

Food price inflation is expected to be 7.3% in 2023, up from 6.2%. Local food inflation is expected to remain elevated, despite global prices continuing to ease, as a result of the lagged effect of the rand’s weakness.

Meanwhile, the rand has weakened slightly compared to the time of the November meeting. The domestic currency is, however, far stronger than in the two months leading up to that meeting, as the dollar’s strength has remained subdued amid US recession fears.

The implied starting point for the rand forecast is R16.92 to the US dollar, compared with R17.68 at the time of the previous MPC meeting.

According to the Reserve Bank’s latest quarterly bulletin, published in December, the exchange value of the rand was suppressed by the negative effects of the increased incidence of load-shedding in the third quarter and into the fourth quarter of 2022.

The rand weakened markedly at the end of last week and into the beginning of this week amid news that load-shedding would probably be a permanent feature for at least the next two years.

The MPC’s statement notes that, while better global prospects have increased appetite for riskier assets, the rand has been less buoyant than other currencies.

Load-shedding will weigh heavily on South Africa’s GDP in 2023, with the Reserve Bank forecasting only 0.3% growth this year — down from the 1.1% forecast at the November meeting. 

At the November meeting, the bank predicted that load-shedding would shave 0.6 percentage points from growth in 2023. The bank now expects the economy to lose two percentage points of growth as a result of the ongoing energy crisis.

“Over the medium term, the forecast takes into account ongoing high levels of load-shedding and more modest household spending and investment growth than previously,” Thursday’s MPC’s statement noted. 

These factors, as well as declining commodity prices, have resulted in the Reserve Bank halving its 2024 growth forecast to 0.7%, down from 1.4% previously. The bank now expects the domestic economy to grow by 1% in 2025, down from 1.5%.