Consumers repaying interest bearing loans will have to adjust their monthly budgets after the South African Reserve Bank (Sarb) governor, Lesetja Kganyago announced that the repurchase rate (repo rate) will increase by 25-basis-points on Wednesday.
This means that the current repo rate in South Africa will increase from 7.00% to 7.25% and will see the prime lending rate increase from 10.50%. to 10.75%.
Kganyago said, "The global economic environment remains challenging and uncertain. Since our last meeting, the Middle East conflict has escalated further. Not much oil is getting through the Strait of Hormuz. Meanwhile, oil exports from Saudi Arabia are being interrupted by fighting in Yemen."
The Sarb governor added that The Russia-Ukraine war is causing ongoing destruction of refinery capacity, and also affecting food exports through the Black Sea.
"These geopolitical events add up to a large, negative and persistent global supply shock, creating additional inflationary pressures," he said.
"We have also seen longer-term interest rates moving higher recently, with various benchmarks reaching multi-decade highs. The main drivers of this include large fiscal deficits, in major economies, as well as inflation risks, and heavy borrowing to fund infrastructure for Artificial Intelligence," Kganyago said.
He said that the central bank still expects a rebound in GDP growth, with annual growth projected at 1.2%, despite the decline of 0.2% in the second quarter.
On inflation, he said that Sarb expects it to be back around levels of around 3% towards the end of 2027.
"We have raised our near-term forecasts. This is mainly because of higher fuel prices. For example, petrol is rising again after moderating between June and August, with an average under-recovery of R2.83 per litre, currently," he said.
"Headline inflation will likely be above 5% later this year and early next year, before slowing as the fuel shock recedes. We currently expect inflation to be back around 3% towards the end of 2027," the governor said.
Kganyago added that food inflation is at its lowest since 2010.
"This reflects strong harvests, as well as a levelling off in meat prices following the outbreak of foot-and-mouth disease. We may start to see drought pressures from El Niño soon, but for now agricultural conditions are broadly favourable," he said.
"Against this backdrop, the committee decided to raise the policy rate by 25 basis points, to 7.25%, effective from 25 September. The decision was unanimous," the governor announced on Wednesday.
Economist reaction
Lead economist at KPMG, Frank Blackmore, said that the geopolitical tensions have created negative energy supply shocks to the economy, which was one of the main drivers for the bank to the increase in the policy rate.
Blackmore said, "The supply shocks will be responsible for second round effects, meaning, besides the direct effect of an increase in prices, it starts to enter labour markets through inflation and that becomes more persisent."
"The central bank does see a slight reduction with downside risks to GDP growth, with the level remaining at the 1.2%. The best way to contain inflation is to change inflation expectations which are still noticeably higher than the bank's target rate. It sits just above the 4% mark, as opposed to the bank's 3% level. The increase in the rates at this point in time will try to decrease the risk in second round effects moving throught the economy and the Reserve Bank has emphasised the fact that they will continune to act as appropiate, in order to get inflation under control, to keep the value of the rand, which is their main target variable," Blackmore said.
Johann Els, Chief Economist at PSG Financial Services said that he expected the decision to be close, with a strong case for a rate hike.
Els said, "However, the fact that it was unanimous was more hawkish than I expected. It seems the Reserve Bank is concerned about the sustained and large global supply shock, and particularly that this will feed through into inflation expectations going forward, limiting the potential for inflation to ease back towards the 3% target."
"Looking through the statement and listening to the discussion at question time, it is clear that there were enough arguments to keep rates unchanged. But it seems the concern that the shock has been sustained for so long, and could therefore push up inflation expectations, was the overriding factor. It also doesn't seem that the fact that global central banks have raised interest rates recently played a major role. To me, the bigger issue was the concern that inflation expectations will rise because of the continued shock," Els said.
"The Governor pointed out, for example, that inflation expectations for the third quarter had come down before it became known that there would be a significant petrol price increase in October. On growth, the Bank said the global situation is having a much bigger impact on South Africa than previously expected. The risks to growth are to the downside, and the GDP growth forecast for this year was revised slightly lower, also reflecting the new information from the negative GDP growth number in the second quarter," Els added.
ashley.lechman@nationalmg.co.za