South Africa Holds Rate Steady At 7% After Easing For A Year

(RTTNews) - The South African Reserve Bank left its key interest rate unchanged at 7 percent as policymakers decided to adopt a wait-and-watch stance following a year-long easing and they also assessed that inflation is set to rise in the coming months due to higher prices for electricity, food and services, while economic growth is set to strengthen. The Monetary Policy Committee decided to hold the rate steady after a year-long easing in a split vote. Four policymakers preferred to keep rates on hold, while two favored a cut of 25 basis points, SARB Governor Lesetja Kganyago said in a statement.

The SARB reduced rates by 125 basis points since September last year. "…we want to see how this is affecting the economy, how expectations evolve, and how inflation risks are resolved," Kganyago said.

Citing the better-than-expected second quarter expansion, the bank raised the GDP growth forecast for this year to 1.2 percent from 0.9 percent, despite a weaker export outlook due to higher tariffs.

South Africa's headline consumer price inflation slowed to 3.3 percent in August, easing for the first time in five months. However, core inflation climbed to 3.1 percent from 3.0 percent.

"We anticipate that headline inflation will rise over the next few months, peaking at around 4 percent," Kganyago said. The forecast now incorporates higher electricity price inflation, of nearly 8 percent rather than 6 percent, given the recent pricing correction, the SARB chief added.

"This is a reminder of the serious dysfunction in administered prices, which undermines purchasing power and weakens growth," Kganyago said. "The solution to this crisis is not a higher level of inflation, but rather sector-specific reforms to improve efficiency."

Upward revisions to food and services prices were also included in the latest projections, which were partly offset by the stronger exchange rate assumption.

The central bank projected inflation to average 3.4 percent this year, 3.6 percent next year and then return to 3.0 percent during 2027.

Risks to the outlook for both inflation and growth were balanced, the bank said.

The bank projections showed rates easing gradually as inflation returns to the bottom end of the 3-6 percent target range. "The MPC emphasizes that stabilizing inflation at 3 percent, rather than 4.5 percent, implies a lower longer-term level for the policy rate," Kganyago said.

The next policy announcement is due on November 20.