Interest Rate Unchanged: Relief for Now, but Inflation Risk Remains

South African Reserve Bank Governor Lesetja Kganyago announced on Thursday afternoon that the repo rate will remain unchanged at 7%.

The decision follows June’s inflation figure, which rose to 5% – the highest level in months. Rising fuel prices and transport costs contributed significantly to the increase.

According to Thys van Zyl, CEO of Everest Advisory Services (Pty) Ltd (FSP 49495, CAT I), the Reserve Bank found itself in a difficult position.

“The Monetary Policy Committee had to weigh the need to keep inflation under control against the pressure that higher interest rates would place on households and businesses.”

According to Van Zyl, the decision suggests that the Reserve Bank is likely of the view that current inflationary pressures are primarily the result of external factors.

“The recent increase in inflation appears to be driven largely by external factors such as higher fuel prices and the knock-on effect these have on transport costs and the prices of other goods and services. In such an environment, an interest rate increase would likely have only a limited impact on current inflationary pressures while placing additional strain on an economy that is already struggling.”

Van Zyl says the decision will provide welcome relief for many South Africans.

“Households that are already under financial pressure now have an opportunity to stabilise their financial position without facing higher debt repayments. It also provides businesses with greater certainty when making investment and expansion decisions.”

He cautions, however, that the decision does not mean inflation is no longer a risk.

“The Reserve Bank’s mandate remains price stability. Should inflation continue to accelerate or inflation expectations begin to deteriorate, further interest rate increases may still become necessary.”

South Africa’s greatest challenge remains economic growth, says Van Zyl.

“Weak economic growth limits job creation, places pressure on tax revenue and discourages investment. It is therefore important that monetary policy does not place unnecessary additional strain on an already vulnerable economy.”

Van Zyl emphasises that monetary policy is only one part of the solution.

“Interest rates alone cannot solve South Africa’s economic challenges. Sustainable economic growth will ultimately depend on policy certainty, improved infrastructure, more efficient logistics, increased investment and continued structural reforms.”

The repo rate was increased by 25 basis points to 7% in May, amid rising inflation, higher fuel prices and ongoing geopolitical uncertainty. Inflation stood at 4.5% in May after increasing to 4% in April.

“The impact of rising energy prices and global tensions was already becoming evident at the time, making it clear that higher fuel prices, transport costs and other input costs would place broader upward pressure on inflation.”

According to Van Zyl, the coming months will be crucial.

“The greatest risk at present is that higher energy prices and geopolitical tensions persist for longer than expected.”