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SARB pauses rates to take stock of local inflation

20 July 2023 FNB

Following the South African Reserve Bank’s (SARB’s) decision to leave interest rates unchanged, FNB will maintain its prime lending rate at present levels and will review its position following the SARB MPC decision in September.

FNB CEO Jacques Celliers says, "Given similar actions taken by other central banks in certain global markets, maintaining the status quo was a probable option for the SARB. However, a bias towards higher rates remains in many developed markets as central banks are wary of a rebound in inflation during the second half of the year. The Reserve Bank is aware that imported inflation and administered prices rather than consumer spending have been driving inflation and is acting with the greatest caution in its monetary policy mandate to maintain price stability.

Locally, the better-than-expected grid performance in the winter months has provided some relief to households and businesses, but energy constraints remain a medium-to long-term risk. While consumer confidence is a volatile metric, we’ve also noted a significant decline in confidence, largely attributed to factors beyond the SARB’s control. As inflationary pressures ease, we can expect a rebound in consumer and business activity. The activation of deferred purchases and investments could boost the economy," adds Celliers.

FNB Chief Economist Mamello Matikinca-Ngwenya says, "Having raised interest rates at every meeting since November 2021 and defying calls for shallower rate hikes, or a pause, in the past few meetings, the end of the hiking cycle has been difficult to predict. Nevertheless, we believe this pause is consistent with the MPC taking stock of local inflation that has fallen within the target band in June, US inflation that has fallen closer to target, as well as an improvement in the risk associated with SA assets and the implied starting point for the rand since the previous MPC meeting.

"In addition, signs of the transmission of monetary policy are starting to trickle in. The 2Q23 FNB/BER Consumer Confidence Index showed that households consider the current period to be inappropriate for the purchase of durable goods. In line with this, new passenger car sales have slowed considerably, and demand for mortgages is falling. Furthermore, affordability constraints amid compressed disposable income and tighter lending standards should constrain spending growth and reinforce slower inflation. Overall, prevailing upside inflation and funding risks should keep the MPC cautious. To insulate their ability to reach the 4.5% inflation target in the medium term, the hiking cycle may be resumed, and most likely, interest rates will remain higher for longer," Matikinca-Ngwenya concludes.

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