South Africa trims rate hikes as power cuts slash growth prospects

South Africa's central bank governor to delivers keynote address
South Africa's central bank governor, Lesetja Kganyago, arrives to deliver a keynote address on monetary policy, growth and jobs at the University of the Witwatersrand in Johannesburg, South Africa, November 1, 2022. REUTERS/Siphiwe Sibeko
  • Central bank raises interest rates by 25 bps
  • Hike smaller than expectations of 50-bp rise
  • 2023 economic growth forecast cut to 0.3%

JOHANNESBURG, Jan 26 (Reuters) - South Africa's rolling power cuts are expected to wipe as much as 2 percentage points off economic growth this year, the central bank said on Thursday as it raised interest rates by just 25 basis points.

The increase to 7.25% (ZAREPO=ECI) was smaller than the 50-bp hike expected by the majority of economists polled by Reuters and followed three 75-bp hikes in a row as the bank tried to pull inflation back from a 13-year peak struck in the middle of 2022.

The South African Reserve Bank struck a gloomy tone on the country's economic prospects, saying growth of just 0.3% was expected this year and 0.7% in 2024. That compares to November growth projections of 1.1% in 2023 and 1.4% next year.

The smaller hike this time suggests bank could be coming to the tail-end of a tightening cycle that started in November 2021, although Governor Lesetja Kganyago used a news conference to stress the bank "meant business" about lowering inflation.

Three members of the Monetary Policy Committee preferred the 25-bp increase, while two wanted a 50-bp increase, Kganyago said.

"While economic growth has been volatile for some time, prospects for growth appear even more uncertain than normal. A material reduction in load-shedding (power cuts) would significantly raise growth," the governor added.

Kay Walsh, managing director at Nova Economics, a consulting firm commissioned by Eskom to calculate the economic cost of power cuts, has estimated 22 billion rand ($1.3 billion) of output was lost in 2022 because of the outages, which reached record levels last year.

The SARB now sees consumer inflation of 5.4% in 2023 and 4.8% in 2024, compared with November's forecasts of 5.4% and 4.5% respectively. Inflation dipped to 7.2% in annual terms in December from 7.4% the previous month, above the bank's 3%-6% target range.

Inflation is expected to sustainably fall to the midpoint of its target range by the fourth quarter of 2024, the bank said.

Reporting by Bhargav Acharya, Kopano Gumbi and Alexander Winning; Editing by James Macharia Chege, Olivia Kumwenda-Mtambo and Nick Macfie

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Alexander reports on and edits breaking news in Sub-Saharan Africa. Previously he was a senior correspondent focused on Southern Africa and correspondent in Russia. Prior to joining Reuters in 2013, he worked at The Moscow Times newspaper.