Why the MPC Kept the Repo Rate Unchanged Despite Lower Inflation

To the surprise of most economists, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) decided to keep the repo rate unchanged at 7.5% last Thursday. This decision came despite inflation remaining steady at 3.2% for February 2025, marking the seventh consecutive month below the SARB’s midpoint target of 4.5%.

SARB Governor Lesetja Kganyago explained the move by stating, “While inflation is still in the bottom half of our target range, it has edged higher over the past few months.” However, some analysts argue that inflation has remained stable rather than rising, making the decision unexpected. The announcement closely followed the U.S. Federal Reserve’s decision to maintain its interest rates, raising speculation that the SARB is aligning its policy with global trends.

The Scenarios Considered by the MPC

The MPC evaluated two major scenarios before making its decision:

1. A Weaker U.S. Economy and a Stronger Rand
   If the U.S. economy slows down, the dollar could weaken, potentially increasing commodity prices—especially gold. A stronger rand and improved trade terms could lead to lower inflation and justify a repo rate cut in the future.
2. The Loss of AGOA Benefits and Trade Barriers
   If South Africa loses its benefits under the African Growth and Opportunity Act (AGOA) and faces higher export tariffs, economic growth could drop by 0.7% in 2025. This scenario could weaken the rand and drive inflation higher, making it riskier to lower the repo rate now.

Given these opposing risks, the MPC opted to maintain the current rate rather than preemptively lowering it. Some analysts argue that with economic growth still weak, the SARB should have cut rates now and waited to adjust if inflation rose later.

Market Reactions: JSE and Rand Performance

Despite the MPC’s decision, stock markets reacted positively. The Johannesburg Stock Exchange’s (JSE) All Share Index (ALSI) climbed past the 90,000-point mark for the first time before closing at 89,519. Gold prices also surged past $3,000 per ounce, reaching a record high of $3,349 before settling at $3,316.

The rand, meanwhile, remained stable, strengthening slightly against the U.S. dollar to close at R18.16. While global markets continue to react to U.S. President Donald Trump’s trade policies, South African equities have shown resilience, gaining 24% over the past year.

Looking Ahead: Key Economic Indicators to Watch

Investors and analysts are now watching several upcoming economic reports that could influence future MPC decisions:

• South Africa’s Producer Price Inflation (PPI) Report (Wednesday): Expected to show a 1.3% increase from February 2024, higher than January’s 1.1% rise. This could support the SARB’s concerns about inflation risks.
• U.S. GDP Growth Data (Wednesday): Forecasts suggest 2.3% growth for Q4 2024, down from 3.2% in Q3. A weaker U.S. economy could influence global trade and currency markets.
• U.S. Personal Income and Spending Data (Friday): Key indicators of consumer demand, which could affect Federal Reserve policy and, in turn, SARB’s future decisions.
• UK Inflation and Retail Sales Reports (Wednesday & Friday): Market movements in Europe may have indirect effects on the rand and local interest rate expectations.

Will the Repo Rate Stay at 7.5%?

While the SARB has taken a cautious approach, economic conditions in the coming months will be critical in determining future rate changes. If inflation remains low and economic growth stalls, pressure will mount for a rate cut. However, external factors—such as the strength of the rand and global trade dynamics—will continue to influence the MPC’s decision-making.

For now, businesses and consumers must navigate an interest rate environment that remains steady but uncertain. Whether this cautious approach benefits the economy in the long run remains to be seen.

The MPC’s decision to hold the repo rate at 7.5% has sparked debate among economists, with concerns over its impact on economic growth. However, given the uncertainty in global markets and South Africa’s trade future, the SARB is taking a wait-and-see approach. Investors and business leaders will be closely monitoring inflation trends and upcoming economic data to gauge the likelihood of future rate cuts.

{Source IOL}

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