JOHANNESBURG: Below are some quotes from South African Reserve Bank Governor Lesetja Kganyago as he announced the central bank’s latest interest rate decision on Thursday.
Inflation
While economic growth is slowing globally, inflation continues to surprise to the upside. Sustained policy accommodation, supply shortages and other restrictions have sharply increased the prices of many goods, services and commodities.
Producer price increases continue to pass-through to wages and consumer prices globally. Our estimate for inflation in the G3 is revised higher to 7.0% in 2022 (from 6.9%), up to 3.5% in 2023 (from 3.0%), and slightly higher at 2.1% in 2024.
Despite reduced global food price inflation, local food price inflation is revised up and is now expected to be 8.1% in 2022 (up from 7.4%). Food price inflation is revised lower to 5.6% (down from 6.2%) in 2023 and remains unchanged at 4.2% in 2024.
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The Bank’s forecast of headline inflation for this year is unchanged at 6.5%. For 2023, headline inflation is revised lower to 5.3% (down from 5.7%), as a result of lower food, fuel and core inflation forecasts for next year.
Headline inflation of 4.6% is expected in 2024 (down from 4.7%).
Our forecast for core inflation is unchanged at 4.3% in 2022, and lower than previously expected at 5.4% (down from 5.6%) in 2023. The forecast for 2024 is also slightly lower at 4.8% (from 4.9%). Services price inflation is broadly unchanged.
Core goods price inflation however is forecast lower in each year, largely due to a lower starting point for vehicles and non-alcoholic beverages inflation.
The risks to the inflation outlook are assessed to the upside. While global producer price and food inflation has eased, Russia’s war in the Ukraine continues, with adverse effects on global prices.
Average surveyed expectations of future inflation have increased to 6.5% for 2022 and 5.9% for 2023.
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Economic growth
This year the South African Reserve Bank expects the South African economy to grow by 1.9%, (from 2.0%).
Growth in the first quarter of this year surprised to the upside, at 1.7%. In the second quarter, flooding in Kwa-Zulu Natal and more extensive load-shedding contributed to a contraction of 0.7%.
Growth in the third and fourth quarters is forecast to be 0.4 and 0.3%, respectively.
The economy is forecast to expand by 1.4% in 2023 and by 1.7% in 2024, above previous projections.
With a low rate of potential, our current growth forecast leaves the output gap broadly unchanged. The output gap is still expected to turn positive in the second quarter of 2023.
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Decision
Against this backdrop, the MPC decided to increase the repurchase rate by 75 basis points to 6.25% per year, with effect from the 23 rd of September 2022.
Three members of the Committee preferred the announced increase. Two members preferred a 100 basis points increase.
The level of the repurchase rate is now closer to the level prevailing before the start of the pandemic.
The revised repurchase rate path remains supportive of credit demand in the near term, while raising rates to levels more consistent with the current view of inflation risks.
The aim of policy is to anchor inflation expectations more firmly around the mid-point of the target band and to increase confidence of hitting the inflation target in 2024.
Guiding inflation back towards the mid-point of the target band can reduce the economic costs of high inflation and enable lower interest rates in the future.
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