Reserve Bank keeps repo rate unchanged, warns municipal dysfunction holds back economic growth

Governor of the South African Reserve Bank Lesetja Kganyago. Picture: Oracio Villalobos Corbis/Getty Images The South African Reserve Bank’s Monetary Policy Committee (MPC) kept the repo rate unchanged at 7% on Thursday, while warning that growing dysfunction in municipalities is increasingly holding back the country’s economic growth. The central bank said failing local governments have become a major constraint on growth, as unreliable delivery of essential services such as electricity, water and infrastructure continues to weigh on businesses, investment and economic activity.

Governor Lesetja Kganyago said four members preferred a hold, while two favoured an increase of 25 basis points. Many analystshad predicted a hold. This isdespite inflation increasing to 5%, higher than the Reserve Bank’s inflation target of 3% Kganyago noted that 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,” he said. “Consumer confidence has fallen sharply, and business confidence has also weakened.

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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.” The governor highlighted that households have suffered from higher fuel prices, while uncertainty has weighed on investment. Kganyago noted it is becoming increasingly clear that poorly run municipalities are hurting the country’s economic growth, as many businesses are moving to better-run municipalities.

He said he cannot speak to why this is happening as he is not an institutional government analyst. Kganyago added that the MPC believes the economy can get back to a rising growth trend as global conditions stabilise. “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.” He noted that inflation has been above target mainly because of higher fuel prices. Petrol and diesel prices eased this month, but global prices have now risen again. Kganyago said headline inflation is expected to stay above 4% until early 2027.

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