South Africa calls end to long run of interest rate hikes

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South Africa’s central bank has ended a long run of monetary policy hikes, keeping its benchmark rate at 8.25 per cent after inflation in Africa’s most industrialised economy returned to its target range.

The South African Reserve Bank said on Thursday that it was pausing rate increases, after a cumulative 4.75 percentage points since 2021 made it one of the earliest central banks in emerging markets to tighten policy over the global surge in inflation of the past two years.

South African inflation slowed to 5.4 per cent in June, according to official statistics, falling below the upper end of a bank target of 3-6 per cent for the first time since April 2022. Excluding food and non-alcoholic beverages, the measure fell below 4.5 per cent.

Overall price rises are “forecast to sustainably revert to the midpoint of the target range by the third quarter of 2025,” the bank said. “Serious upside risks to the inflation outlook remain,” it added.

“The job is not done,” said Lesetja Kganyago, central bank governor. “We’re ready to deploy our tools to tackle this monster that’s eating the income of South Africans. We believe we’ve turned the corner [but] there are still risks on the horizon.”

Policymakers are at the same time facing further signs of weakness in South Africa’s stagnant economy, which is battling intense rolling blackouts imposed by the broken Eskom state power monopoly. Indicators from retail sales to mining data have deteriorated in recent weeks.

The central bank slightly raised its forecast for growth to 0.4 per cent this year, but warned that “energy and logistical constraints remain binding on the growth outlook, limiting economic activity and increasing costs.” The bank expects 280 days of rolling blackouts in 2023.

Several developing economies have experienced signs of disinflation over recent months as global goods prices have calmed. 

Yet many of their central banks are under pressure to remain hawkish, particularly as long as the US Federal Reserve is signalling a tightening of interest rates, which influence demand for investing in emerging markets.

While three members of the bank’s monetary policy committee voted for the pause, two advocated for a further increase of 0.25 percentage points. 

“The split vote suggests that inflation concerns continue to linger and it’s likely to take some time before a majority on the MPC are in favour of rate cuts,” said Jason Tuvey, deputy chief emerging markets economist at Capital Economics.

Mamello Matikinca-Ngwenya, chief economist at South African bank FNB, said: “To insulate their ability to reach the 4.5 per cent inflation target in the medium term, the hiking cycle may be resumed. Most likely, interest rates will remain higher for longer.”