Reserve Bank Governor shares views on inflation and interest rates

Lesetja Kganyago

South African Reserve Bank Governor Lesetja Kganyago said that as long as inflation falls outside the 3% to 6% target band, the Reserve Bank will continue to increase interest rates.

He spoke to CNBC Africa on the sidelines of the World Economic Forum’s annual meeting in Davos.

Kganyago said people are worried about rising living costs and a global recession, with a generation that has not experienced high inflation.

“There is a generation experiencing high inflation for the first time. People are increasingly intolerant of inflation,” he said.

He added that central banks are tasked with keeping inflation in check, which is why there is an increasing focus on the policies of these institutions.

Commenting on South Africa, he said inflation was anchored at 4.5% prior to the pandemic thanks to the Reserve Bank’s flexible policy.

However, towards the end of 2021, inflation started to rise, which resulted in the central bank increasing interest rates to manage inflation.

“South Africans should be thankful that the Reserve Bank took steps early, which prevented aggressive interest rate hikes,” he said.

Kganyago said inflation started to ease in South Africa with three months of consecutive declines.

The latest Statistics South Africa data shows that inflation slowed to a seven-month low of 7.2% in December.

However, there are concerns that a sharp increase in electricity costs may force the central bank to keep interest rates higher for longer.

The Bureau for Economic Research’s (BER’s) Inflation Expectations Survey for Q4 2022 also showed that analysts, businesspeople, and trade unions expect inflation to rise.

Kganyago said inflation went up like a rocket, but declined much slower despite regular interest rate hikes over the last year.

“What we need to see is inflation declining firmly to within the inflation targeting range of 3% to 6%,” he said.

If inflation rises, in line with the BER’s Inflation Expectations Survey, the Reserve Bank should start to worry.

“We must remain vigilant to ensure that if inflation moves away from the target, we increase interest rates to stop it,” he said.

He added that because of prudent monetary policy, South Africa avoided aggressive interest rates, like the 25% interest rate in 1998.

“Monetary policy is now anchored on an inflation targeting framework that is flexible enough to absorb the shocks when they hit the economy,” he said.

Interest rate expectations in 2023

Luigi Marinus, Portfolio Manager at PPS Investments, said they expect further rate hikes to bring inflation below 6%.

“The Reserve Bank was ahead of the curve in starting the hiking cycle but could not prevent inflation from heading above the top end of the target band,” he said.

“The Reserve Bank governor remains hawkish in his rhetoric with the aim to bring inflation back to the midpoint of the target band.”

“Even though inflation has printed lower this month, it seems likely that the hiking cycle has not yet fully played out.”

Nedbank chief economist Nicky Weimar agrees, saying she expects at least two more 25 basis point rate hikes in the coming months.

She said interest rates are likely to peak in March and stay at that level for some time unless inflation drops significantly.

BNP Paribas South Africa senior economist Jeff Schultz expects the SARB to hike rates by another 75bp in Q1 2023.

“We have added an additional 25bp hike in March to the 50bp we already expected on 26 January, taking our terminal policy rate forecast to 7.75% by the end of Q1,” he said.

Efficient Group chief economist Dawie Roodt expects the Reserve Bank to increase interest rates by 50bp, followed by 25bp after that.

“After that, we are pretty much done, based on what we know at the moment,” Roodt said. “The worst is behind us unless something goes horribly wrong.”


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