South Africa

Reserve Bank holding firm on fight against inflation

The South African Reserve Bank may be gaining the upper hand on inflation, but risks including power outages that add to the costs of food production and doing business mean Governor Lesetja Kganyago is reluctant to pivot away from policy tightening.

While the monetary policy committee moved closer to ending its hiking cycle when it lifted borrowing costs by 25 basis points to 7.25% on Thursday — the smallest increase in five meetings — it maintained a hawkish stance as it sought to anchor price-growth expectations more firmly around the 4.5% midpoint of its target band.

The rate of price growth has breached the 6% upper limit of its target for seven straight months and is only seen firmly back at the midpoint from the second half of 2024.

“Inflation is a problem: South Africans have expressed discomfort with the fact that inflation is eating into their incomes,” Kganyago told reporters at a press conference north of Johannesburg on Thursday.

“You can rest assured that this central bank means business about price stability.”

The MPC has front-loaded its fight against inflation, and the key is rate is now higher than the year-end 2023 level that its quarterly projection model suggests it should be.

It doesn’t target an interest rate level and so doesn’t have a particular terminal rate in mind, Kganyago said.

The lower-than-expected increase — only six of the 21 economists in a Bloomberg survey predicted the move, with the rest plumbing for a 50-basis-point increase — saw forward-rate agreements adjust lower as traders reduced bets on further tightening.

A final interest-rate rise of 25 basis points is likely in March, and any further tightening would be “too onerous” for economic growth, said Sanisha Packirisamy, an economist at Momentum Investments.

The central bank slashed its forecast for economic growth in 2023 to 0.3% from 1.1%.

That’s as rolling blackouts, known locally as load-shedding, are predicted to shave two percentage points off output growth during the year, according to the central bank’s projections.

South Africa is suffering its worst-yet electricity rationing, with state-owned company Eskom implementing rolling blackouts on 205 days last year and every day so far in 2023.

The outages, which are needed to protect the grid from collapse when the utility’s plants can’t meet demand, “may have broader price effects on the cost of doing business and the cost of living,” Kganyago said.

Political pressure

The South African Reserve Bank has now delivered 375 basis points of tightening since November 2021.

Its stance, in response to the worst global inflation shock in a generation, has meant the country hasn’t experienced target misses on the scale that some African and developed-market nations have.

Interest-rate increases haven’t been as large as in some other emerging markets.

Still, it’s likely to draw further criticism from detractors, including senior members of the governing African National Congress that want to change its mandate to include economic growth and job creation.

With the economy stuck in its longest downward cycle since World War II and the ANC failing to meet its targeted jobless rate of 14% by 2020, opinion polls show it risks losing its national majority in elections scheduled for 2024.

Central banks aren’t designed to shape the way labour markets should work, Kganyago said.

If the Reserve Bank is given an employment mandate, it would need a say on how the job market functions “otherwise you’ll be setting us up to fail”.

Amending the central bank’s mandate would require changing the constitution, something the ANC would need support from opposition parties to do.

“It’s not like these experiments have not been tried elsewhere,” Kganyago said.

“Unorthodox policies have led to exactly orthodox outcomes. High inflation is not a growth strategy.”


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