Interest Rate Hike
UNSPLASH

The South African Reserve Bank downgraded its prediction for growth this year, which led interest rates to rise by a mere 25 basis points, Thursday.

Three monetary policy committee members approved the 25 basis point rise, while two supported a 50 basis point increase.

According to the Reserve Bank, the recurring power outages in South Africa are anticipated to reduce economic growth by as much as two percentage points this year.

Lesetja Kganyago, Governor of the South African Reserve Bank, was pessimistic about the economy's future, citing that only 0.3% growth this year and 0.7% growth in 2024 were predicted. In comparison, the growth forecasts for 2023 and 2024 in November were 1.1% and 1.4%, respectively. "While economic growth has been volatile for some time, prospects for growth appear even more uncertain than normal. A material reduction in load-shedding (power cuts) would significantly raise growth," he said, as per Reuters.

Continuous power failures, according to Kganyago, not only limit economic growth but also raise inflation. The bank now forecasts that load shedding will occur for more than 200 days this year, which it claims will slow growth by two percentage points.

Along with reduced growth, he anticipates a reduction in investment, and exports will likely be less robust due to falling commodity prices. "Investment is still positive but revised down due to weaker confidence and lower growth than we expected," said Kganyago, as per EWN.

The bank's forecast for growth was revised downward, but it maintained the headline inflation rate for 2023 fixed at 5.4%, which is still higher than the bank's aim of 4.5%.

The inflation outlook is strained, with both headline and core inflation likely to continue under pressure due to various factors, with upside risks, according to Kganyago.

Positively, a decrease in fuel price inflation is anticipated. The inflation of electricity prices, however, is thought to be higher. Given the situation, the governor predicted that food price inflation would continue to be elevated throughout the year.

The projected increases in local electricity prices are now 12.9% in 2023, 14.5% in 2024, and 10.9% in 2025.

When asked about a potential "terminal" position for local interest rates, the governor said that the bank does not aim for interest rates but seeks to stabilize prices. One instrument the bank uses to accomplish this is interest rates.

Consumers are intolerant of high prices since global inflation is increasing. According to Kganyago, the rate hike was necessary to fulfill the Central Bank's duty to promote price stability.