South African consumers can expect to feel more financial pain, as the Reserve Bank's monetary policy committee (MPC) increased the repo rate by 50 basis points to 8.25%. This means that commercial banks will in turn hike the prime lending rate to customers, from the current 11.25% to 11.75%. The decision to hike the repo rate was a unanimous one.
In announcing the MPC decision on Thursday, Reserve Bank Governor Lesetja Kganyago highlighted "persistent and elevated financial stability risks", despite an improved global growth outlook.
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Heightened geopolitical tension and the continued war against Ukraine continue to affect the growth outlook for Asia and Europe, Kganyago said, while pointing out that, although the US appears resilient, it is also at risk of financial fragilities. The world's growth engine – China – will remain modest and have little benefit to commodity prices.
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Core inflation around the world continues to rise, the governor said. South Africa's consumer price index came in at 6.8% for April, still well outside the Reserve Bank's 3% to 6% target band. This compares with the global inflation forecast of 7%. The core drivers of South Africa's inflation rate are fuel, electricity and food price inflation, with the last coming in higher than the other two. Food price inflation is expected to come in at 10% for 2023 (an upward revision from the previous 9.9%).
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As a result, the country's growth outlook for 2023 remains anaemic at best – 0.3% – with load shedding continuing to limit economic activity and delivering a hammer blow to the economy. The power crisis is itself expected to shave two percentage points off growth just this year.
The economic effects of load shedding and transport logistics cannot be underestimated. According to the Reserve Bank: "The number of days of expected load shedding is higher, at 280 days, 150 days and 100 days, respectively, in 2023, 2024 and 2025. Estimates of the average stages of load shedding are multiplied by the number of days and then multiplied by the cost to GDP per stage day. The cost per stage has been revised lower for stages 1 and 2. In nominal terms, these costs vary between R0 to R1.2 million for stages 1 and 2 and up to R204 million to R899 million for stages 3 to 6."
Although, private sector investment remains positive, largely to overcome the constraints presented by the power crisis and logistics.
Kganyago said that the rate decisions would not be amended until the inflation rate began to normalise to the median target inflation. He added:
The governor emphasised that conditions in the economy remained volatile and vulnerable to price shocks, but the Reserve Bank continued to monitor the market for stress.
On the slide in the rand's value, the governor said $26 billion (R503 billion) had been put on the market to try to stabilise the currency's movement, but the lesson to be learnt is that no reserve bank can control the movements in currency, even though they may wish to. Its current starting point for the latest rate decision is R18.68 to the dollar, from R17.80 at the time of the previous meeting.
Asked whether the country would avoid a recession in the year, the governor said that, although growth was low at 0.3%, a recession (technically, two quarters of negative growth) was not anticipated, but was also not outside of the bank's expectations.