ARTICLE BY PROPERTY24
The SARB's Monetary Policy Committee decided to keep the repurchase rate at its current level of 8.25% per year, meaning that the prime rate holds steady at 11.75%. Four members preferred an unchanged stance, and two preferred a reduction of 25 basis points.
Governor of the South African Reserve Bank, Lesetja Kganyago, shared in his speech that as we move into the second half of the year, global inflation continues to ease. The very rapid price increases of 2022 and 2023 have receded. However, inflation in most economies has yet to stabilise in line with targets. For example, in June, consumer price inflation was 3% in the United States, and 2.5% in the euro area, still above those economies’ 2% targets. Services and wage price inflation has proven stubborn, underpinned by resilient economic activity and low unemployment rates across major economies.
Clearly, the battle against inflation is not yet won, and for this reason, global interest rates remain elevated.
Economic performance:
Turning to South Africa, economic performance in the first half of the year was disappointing. The economy contracted slightly in the first quarter, by 0.1%, and recent data, including last week’s mining and manufacturing numbers, have caused us to trim our second quarter growth estimate modestly, to 0.6%. Over the medium term, we expect somewhat faster growth, supported by a more reliable electricity supply and improving logistics, among other factors. Our revised growth projections nonetheless remain below longer-run historical averages, of about 2%. The risks to this forecast are assessed as broadly balanced, with ample scope for structural reforms to lift growth further over the medium term.
Inflation outlook:
On the inflation front, the most recent headline print, for May, was 5.2%, unchanged from April and still in the top half of our target range. The outlook, however, has improved somewhat. Headline consumer price inflation for this year is now projected at 4.9%, compared to 5.1% at the previous meeting. Over the next few quarters, headline is expected to dip below the 4.5% midpoint, mainly because of fuel and food prices. This outlook is supported by the stronger rand. The implied starting point for our forecast is now at R18.35 to the US dollar. Over the medium term, we continue to see inflation stabilising at 4.5%, with core inflation remaining close to this midpoint objective throughout.
For inflation expectations, the latest survey results show average expectations at 5% next year and 4.9% two years ahead, still uncomfortably above the SARB’s 4.5% objective, and above our own inflation forecasts. However, all categories of respondents lowered their inflation expectations from the previous survey. We anticipate further progress as inflation slows, helping to re-anchor expectations firmly at 4.5%.
While the forecast has improved, the balance of risks is assessed to the upside.
Against this backdrop, the MPC decided to keep the repo rate unchanged at 8.25%. Four members preferred an unchanged stance, and two preferred a reduction of 25 basis points.
In discussing the stance, MPC members agreed that restrictive policy remains appropriate to stabilise inflation at 4.5%. The committee assessed that an unchanged stance remained appropriate, given the inflation risks. Some members, however, were of the view that the inflation outlook had improved enough to reduce the degree of restrictiveness.
Approximate monthly bond repayments over a 20-year term with the current repurchase rate of 8.25%
Bond: Repayment:
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
