Governor Kganyago keeps rates on hold at 7% (full speech)

Oil prices, which had declined to about $70 a barrel earlier this month, have now rebounded to roughly $90. For the global economy, the war has disrupted supply chains and impacted incomes. At the same time, the artificial intelligence boom has delivered an offset with huge investments in data centers and elevated valuations for AI-related companies. Overall, world growth and inflation forecasts are largely unchanged since our last meeting.

Among the major central banks, both the Bank of Japan and the European Central Bank raised rates at their June meetings, which was expected. Meanwhile, the Bank of England, the People's Bank of China, and the US Federal Reserve have been on hold. That said, Fed communications have emphasized the importance of price stability and rates have shifted up significantly at the short end of the US yield curve. In this context, the dollar has strengthened against other major currencies.

Moving to South Africa, first quarter growth was stronger than expected, running close to 2% year on year. However, this was due to higher net exports rather than domestic demand. We anticipate slower growth through the second and third quarters of this year. Consumer confidence has fallen sharply and business confidence has also weakened. Sectoral data show generally lower activity since the start of the war. Prices for our export commodities have also fallen. Although terms of trade are better given lower prices for imports.

We started this year with good momentum, but households have suffered from higher fuel prices while uncertainty has weighed on investment. It is also increasingly clear that municipal dysfunction has become a binding constraint on growth. With domestic reforms, we think the economy can get back to a rising growth trend as global conditions stabilize. Our baseline forecast is that the economy starts to recover in the second half of this year as the shock fades, but the outlook is uncertain. We see downside risks to growth.

Turning to inflation, recent prints have been well above target, mainly because of higher fuel costs. Petrol and diesel prices eased this month, but global prices have now risen again. We expect headline inflation to stay above 4% until early next year. Aside from fuel, goods prices have been relatively contained. The exchange rate has been resilient and the rand is close to where it started the year against the dollar and it is now stronger against the euro. This has helped with import prices. Food inflation has also slowed recently. This reflects good harvests as well as fading effects from the outbreak of foot and mouth disease. El Nino may start affecting food supply next year, but this is still a risk factor not part of our baseline. For services inflation, conditions look problematic with most components now well above 3% including insurance, transport, and housing. Our various measures of underlying inflation also indicate stronger inflation pressures.

According to the latest survey from the Bureau for Economic Research, inflation expectations have risen. The changes are bigger for the near term than the longer term. All survey groups anticipated higher inflation with the biggest change coming from trade unions. As for market expectations, break-even rates have eased since May, but they are still higher than they were at the start of the year. We see upside risks to inflation.

Against this backdrop, the committee decided to keep the policy rate unchanged at 7%. Four members preferred a hold while two favored an increase of 25 basis points. The committee agreed that the outlook is uncertain and with the rate increase at our previous meeting, the policy stance is appropriate for now with rates somewhat restrictive. The forecast from our quarterly projection model shows the policy rate broadly stable through the remainder of the year. The model shows cuts later in the forecast as inflation falls to 3% and rates adjust towards neutral levels.

As before, this rate path remains a broad policy guide and our decisions will continue to be taken on a meeting by meeting basis with careful attention to the outlook, data outcomes, and the balance of risks to the outlook.

To support our risk assessment for this meeting, we considered scenarios for inflation expectations as well as fuel prices. For expectations after the upside surprise in the recent survey, we looked at what could happen if inflation expectations keep on rising throughout this year. The scenario showed extra pressure on wages which feeds through to core inflation. The core model therefore sees tighter policy with one more rate hike than the baseline forecast and rates staying higher for longer after that.

For fuel, the recent volatility in oil prices shows that we face both upside and downside risks depending on how the Middle East conflict evolves. We therefore considered an adverse case with oil at $100 a barrel for 2026, easing slowly to $80 by 2029. That was paired with a positive scenario where oil is $78 this year, falling to $60 by 2029. The adverse scenario has inflation persistently above target with the shock feeding through to food prices as well as coal. This requires an extra hike this year and an extended period of restrictive policy. By contrast, the favorable scenario shows inflation returning to target more rapidly, implying that rates start easing in the current year.

To conclude, the inflation outlook has improved slightly since our last meeting, but inflation is still too high while growth is weak. We are setting policy to achieve 3% inflation over time, ensuring the current supply shock does not de-anchor inflation expectations. At the same time, we recognize that South Africa's growth prospects will be driven mainly by domestic reforms. This covers structural interventions such as fixing local government and improving productivity in network sectors like transport and energy. It also includes the macroeconomic goals of sustainable debt and permanently lower inflation. Our main contribution is to stabilize inflation within line with our 3% target over time and the MPC will act as needed to achieve that.

That concludes our statement and we will take questions from the members of the press and as usual please identify yourself and the house you represent and we will direct your questions as appropriate. Copan.

I was going to take three questions, but you asked three questions. So, let me deal with the questions right away and then I'll go to the next one. Inflation is 200 basis points above target. That is the last print. That is in the past. There is nothing we can do with last month's inflation. Our focus is on inflation within the horizon. There is nothing monetary policy can do with this month's inflation or next month's inflation or even the September inflation; it's outside of the monetary policy horizon. And that's why you see us taking a view that takes you a few quarters ahead and this time around we also added quarters of 2029. You say what brought the forecast down? A number of factors. You might have realized that when we were at the main meeting we had the oil price assumption averaging $91 a barrel for the year and we now have $82 a barrel for the year. The rand had been resilient. We have got food disinflation that is actually taking place. We have already had a drop in the domestic price of fuel at the pump. You might have another one going up. It is very volatile. But that is the environment that we are operating in. You said what gives you confidence? We have got to work with the information we have and that is why we cannot tell you for sure what's going to happen and we say we will take every decision meeting by meeting depending on the data, the outlook, and the balance of risks to the outlook. That is the stance that we would take. And of course that answers your second question. We have revised the headline inflation lower.

Core is continuing to rise. We are watching that very closely. But we still expect core to peak at 4.1% in the first quarter of next year. And this year we expect it to be just below 4% for this year. So that gives us the basis on which to move. You would also see in the statement we do refer to the other measures of underlying inflation. We have developed these other measures that determine what underlying inflation is because there tends to be this narrative that says it's because of oil so you can do nothing about inflation and we say okay let us remove all these volatile prices and see what happens. So whether you look at the super core measure or whether you look at the trimmed mean or the principal component core component of inflation, common component of inflation, you will see that they are ticking up but even as they are ticking up they are not outside of the tolerance bands. But we will continue to watch those. The important thing about all of those measures is that if they continue accelerating it tells you that second round effects are starting to kick in and you will have to calibrate policy accordingly.

Services inflation has been an issue for us. For a long time services inflation was so contained. It is now beginning to rise and a closer look shows that it is driven by medical insurance and other insurance services. But we think that you might actually be seeing housing and utilities also beginning to kick in. But still services inflation is expected to be just above the tolerance band. But overall inflation will be within the tolerance band and closer to 3% by the end of next year and into 2028 and 2029 it should be bang on target. Um, the next row.

Miss Kumalo, the municipal dysfunction, we can't pin it down to anything. We are not institutional government analysts. What we do know is that it is constraining business and economic activity. What the source is is for the government to identify. Suffice for us to say the big method there's dysfunction and that dysfunction is constraining economic activity. We have heard of companies that relocate out of dysfunctional municipalities to try and find greener pastures elsewhere. We're just grateful that they still can find greener pastures in South Africa and they didn't decide to seek those greener pastures elsewhere.

And policy stance. There are a number of things that you could look at the policy stance. We believe that our policy stance is appropriate. You can look at what we call the neutral real interest rate and if the policy rate is above the neutral real interest rate we say that we are restrictive and if it is below we will say that we are accommodative. Put simply, the neutral real interest rate is that interest rate that is neither stimulatory nor contractionary. As it stands within the policy horizon looking forward, we are still restrictive, less so than in the past. And the reason why it is less so is because the rise in inflation has been faster than the rise in the policy rate. And so that made us to be still restrictive but less restrictive than we were previously. That is one. Two is that people also tend to look at a contemporaneous real policy rate. And they would say, 'Oh, inflation was 5% last month, the policy rate is 7%, therefore the real rate is 2%.' Not very useful because you are measuring the past. What matters is what are the expectations of inflation within the policy horizon that is 12 months ahead, 15 months ahead, and say what is that stance and that stance we are still reflecting a positive stance. But this also links to what Copano raised about what makes us think that the steps that we have taken are going to have an effect on inflation and what have we seen from the current print. I would be lying to you if I told you that we are looking at this over the policy horizon. If we claim victory that the stance we took in May had impacted on June's inflation we will be being dishonest. By the same token don't say you adjusted the policy rate in May and inflation has gone up that means that it is not enough. There is a lack in the monetary policy effect and stance. You said that some chap spoke at the BER and said that the reserve bank is acting preemptively. Not me. I didn't talk about acting preemptively. I said we acted timely. Very subtle difference. We acted timely because we were seeing that there are indications that second round effects are beginning to kick in and it's time for us to act. That if you wait until the second round effects are in the room, it is too late and you will then be forced to act more aggressively than you would have otherwise. That is what I was saying. I was not talking about being preemptive.

Balisa, the second round effects. I think that what I was dealing with the question about the different measures we try to strip out things to try and see what is there in the price formation process that indicates second round effects are kicking in. The easiest one has to do with wage demands and wage settlements. As soon as the wage demands start to run ahead of inflation, it says that the price setters in the labor market are saying that they are expecting higher inflation and therefore you have got to nip that. The other of course is the pricing power of businesses. And when you see businesses beginning to raise prices because of inflation, you are having an indication of second round effects. And again remember that they do these things and sometimes you might not even pick that they had raised prices until the next CPI is released and if you again wait for that you might actually be too late. So you're going to have to be exercising a lot of judgment in identifying those second round effects.

Okay, that's the last question. Alistister, looking forward to towards September. The question is not fundamentally different from the one Copano asked earlier. You asked would we be focusing on inflation going towards that peak that we mentioned. I'm saying that the peak is next year, not this year. You ask are we looking at that? Of course that is what we are targeting, we always look at it, but we have also got to be looking at the underlying measures of inflation because those are important. If you strip out the volatile ones then what do you get? The question about stripping the volatile ones is that these volatile ones at times they also contract. So sometimes when you strip them they actually show that inflation is going up but there are times when you strip them it shows that actually there aren't inflationary pressures. So we have got to look at all of this and then of course we have got to look at other data. For us we have got to understand to what extent of slack in the economy is. The preferred measure of slack for the South African Reserve Bank which we use in our quarterly projection model is of course the output gap, and that output gap is closing over the policy horizon but it is still negative in the near term. And we had seen that is consistent with the fact that we are actually seeing demand that is weak. But then Copano says are you emphasizing growth more than inflation? We are in a very difficult bind. The worst position for a central banker to be in is to have rising inflation and weak demand because you do not have an instrument for one or the other. You have got the same instrument and so where do you deploy it in that instance and that is why you