The South African Reserve Bank (SARB) has done the hard work and is probably at the turning point in its interest rate hiking cycle, but another hike may be necessary to ensure inflation does not become entrenched.
Efficient Group chief economist Dawie Roodt told BusinessDay TV that the worst is behind us. However, an additional interest rate hike is possible due to South Africa’s economic inefficiencies.
Roodt said it is normal for the SARB governor, Lesetja Kganyago, to be hawkish in response to the media and the Monetary Policy Committee’s statement.
In such a volatile economic environment, it is even more important for the governor to maintain a consistent message, as the battle against inflation is also psychological.
The Reserve Bank has to make South Africans believe it is willing to tighten monetary policy sufficiently to end inflation.
Kganyago said the committee will remain vigilant as there are several upside risks to inflation.
“At the current repurchase rate level, policy is restrictive, consistent with elevated inflation expectations and the inflation outlook,” he said.
“Serious upside risks to the inflation outlook remain. In light of these risks, the Committee remains vigilant, and decisions will continue to be data-dependent and sensitive to the balance of risks to the outlook.”
“The governor effectively said, ‘Watch out. If you misbehave, I will increase interest rates again’”, Roodt explained.
So far, the Reserve Bank has successfully made South Africans believe that inflation will be brought down by any means necessary.
Inflation is not an event where prices increase once, and the SARB has to react. Rather, it is a process whereby prices keep rising, and money keeps losing value.
If prices keep rising for a significant period, then inflation becomes entrenched in an economy, and it becomes extremely difficult to combat through interest rate increase alone.
The Reserve Bank has to be aggressive in fighting inflation to prevent it from spilling over from a temporary shock in fuel or food prices to other goods, referred to as core inflation.
In the last inflation reading, core inflation only came down marginally and not as much as expected by the Reserve Bank.
This justifies their position in remaining hawkish, as the Reserve Bank cannot allow the cost base of the economy to rise.
The Reserve Bank’s job is not done, said Roodt. It has to ensure that the decline in headline inflation is sustained and does not spread to other goods.