South Africa's Reserve Bank did the one thing almost nobody expected this week: nothing at all. In a split four-to-two vote, its Monetary Policy Committee kept the repo rate at 7%, which leaves the prime lending rate borrowers actually pay at 10.50%. That was a genuine surprise. Sixteen of 25 economists polled by Reuters had expected a hike.
A hold that markets hated
The reaction was quick and unkind. The rand plunged more than 2% against the dollar on the day. Citigroup had been betting on a stronger rand, and within hours of the decision it closed the trade, booking a loss of about $468,000 on a $22 million position after concluding the currency would stay "fragile". The Reserve Bank's own reasoning was that policy is already tight enough. Four members preferred to hold, judging the stance "appropriate for now, with rates somewhat restrictive", while two wanted 25 basis points more.
Inflation is the problem
The hold came even though inflation reached 5% in June, above the bank's 3% target, driven mainly by higher fuel costs. Oil, which had dropped to about $70 a barrel earlier in the month, had rebounded to roughly $90 as the bank met, with the resumption of the US-Iran war pushing up fuel and fertiliser prices. Even so, the bank nudged its forecasts in a friendlier direction, trimming its inflation projection for this year to 4.0% and lifting its growth forecast to 1.4%. Governor Lesetja Kganyago was unusually candid about how hard the call was. Monetary policy, he said, "is a dismal science", and "in this uncertain environment, you can forgive people for missing what they had actually expected". He went further, conceding that "it might just turn down the line that we were wrong".
Not everyone is convinced the pause will last. Citi's economist Gina Schoeman still expects a 25-basis-point hike in September, calling this a "hawkish hold" that leaves the door open. Debt counsellors, meanwhile, welcomed the breather but warned it changes little for stretched families, with the prime rate "locked at 10.50%".
For now, households carry on under a 10.50% prime rate, and the next decision in September will show whether the governor's gamble on holding pays off.
