SARB Keeps Repo Rate Unchanged at 8.25%: An In-Depth Analysis
July 18, 2024
The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) has decided to maintain the repurchase rate at 8.25% per annum, keeping the prime lending rate steady at 11.75%. This decision saw four committee members favoring no change, while two advocated for a 25 basis point reduction.
Governor Lesetja Kganyago, in his address, highlighted the ongoing global easing of inflation as we move into the second half of the year. The sharp price increases experienced in 2022 and 2023 have subsided, though inflation rates in many economies remain above targets. For instance, in June, consumer price inflation stood at 3% in the United States and 2.5% in the euro area, both exceeding the 2% target. Persistent wage and service price inflation, driven by robust economic activity and low unemployment, contribute to this trend.
Despite progress, the fight against inflation continues, necessitating sustained high global interest rates.
South Africa's Economic Performance
Domestically, South Africa's economic performance in the first half of the year has been underwhelming. The economy contracted by 0.1% in the first quarter, and recent data, including last week's mining and manufacturing figures, have led to a downward revision of second-quarter growth estimates to 0.6%. Looking ahead, moderate growth is anticipated, bolstered by more reliable electricity supply and improvements in logistics. However, growth projections remain below the historical average of around 2%. Structural reforms offer potential to further enhance medium-term growth prospects, though risks to this forecast are seen as balanced.
Inflation Outlook
On the inflation front, May's headline inflation rate was 5.2%, unchanged from April, staying in the upper half of SARB's target range. The outlook has improved slightly, with headline consumer price inflation now projected at 4.9% for this year, down from 5.1% previously. In the coming quarters, headline inflation is expected to dip below the 4.5% midpoint, primarily due to lower fuel and food prices, supported by a stronger rand, now starting at R18.35 to the US dollar. Medium-term forecasts predict inflation stabilization at 4.5%, with core inflation hovering around this target.
Inflation expectations for the next year average 5%, and 4.9% for the following year, according to recent surveys. While these figures exceed SARB's 4.5% target, they have improved from previous surveys, suggesting further progress as inflation declines, helping to anchor expectations at the desired level.
Despite a more favorable forecast, the balance of risks remains tilted upwards.
Monetary Policy Decision
Given this backdrop, the MPC opted to keep the repo rate at 8.25%, with four members supporting an unchanged rate and two advocating for a 25 basis point cut. The committee agreed that maintaining a restrictive policy stance is appropriate to stabilize inflation at 4.5%. Although some members felt the improved inflation outlook justified a less restrictive stance, the prevailing view was to maintain the current rate due to ongoing inflation risks.
Impact on Monthly Bond Repayments
With the repurchase rate holding at 8.25%, here are the estimated monthly bond repayments over a 20-year term:
R750,000 bond: R8,128
R900,000 bond: R9,753
R1,000,000 bond: R10,837
R1,500,000 bond: R16,256
R2,000,000 bond: R21,674
R2,500,000 bond: R27,093
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