Introduction to the Repo Rate Decision
The Reserve Bank has decided to keep the repo rate at 6.75%. This decision was made after considering various factors, including the current state of the global political order, food inflation in South Africa, and the stronger rand and lower oil prices.
Factors Influencing the Decision
According to Bank Governor Lesetja Kganyago, the global political order seems to be experiencing a rupture, which is affecting economies worldwide. Additionally, South Africa’s food inflation has been impacted by the foot-and-mouth disease outbreak. The stronger rand and lower oil prices have also played a significant role in the Bank’s decision. Kganyago also mentioned that there are new threats to central bank independence and that 2026 has begun with a new round of shocks.
Monetary Policy Committee’s Decision
The Monetary Policy Committee (MPC) met and decided to keep the repo rate unchanged. Two members voted for a cut, while four preferred to hold the rate at 6.75%. The decision was influenced by the current market conditions, with markets being jittery and precious metals like gold receiving safe-haven flows. The MPC also considered the risks of an AI bubble and its potential impact on the economy.
Inflation Expectations
The consumer inflation rate edged up slightly in December, closing the year at 3.6%. However, the annual average for 2025 was 3.2%, which is the lowest since 2004 and within the Bank’s official 3% target. The Reserve Bank expects inflation to have peaked at December’s 3.6% and to slow down from here. The Bank has also lowered its 2026 inflation forecast from 3.5% to 3.3%, citing a stronger rand and lower oil price assumption.
Impact of the Stronger Rand and Lower Oil Prices
The rand has rallied more than 8% against the US dollar since the November MPC meeting, outperforming many emerging-market peers. The stronger rand and lower oil prices have supported expectations that inflation will continue to moderate in the months ahead. However, the Bank is keeping an eye on food inflation, especially meat prices, which are being affected by the foot-and-mouth disease outbreak.
Scenarios Considered by the MPC
The MPC considered two scenarios: one favourable and one adverse. In the favourable scenario, the rand strengthens further, and oil prices continue to decline, leading to a temporary drop in inflation to 2.3%. In the adverse scenario, the rand weakens, and oil prices rise again, causing inflation to peak at 4%. The MPC’s decision takes into account these scenarios and their potential impact on the economy.
Conclusion
In conclusion, the Reserve Bank’s decision to keep the repo rate at 6.75% is a cautious approach, considering the current market conditions and the potential risks to the economy. The Bank’s decision is aimed at keeping inflation within the target range of 3% plus or minus one percentage point. As the economy continues to evolve, the Reserve Bank will closely monitor the situation and make adjustments as necessary to ensure that inflation remains under control and the economy grows sustainably.
