SARB warns of triple blow for South Africans – including a ‘price spiral’

 ·19 Oct 2022

Economists and analysts are predicting a 50 basis point hike to interest rates in November, following two successive hikes of 75bps in July and September.

The latest Thomson Reuters Econometer poll published this past week shows that analysts are now materially more hawkish on the interest rate outlook.

The results now show the consensus repo rate forecast at 6.75% in Q4 22 (a 50bps hike) compared with 6.50% (a 25bps) in the September poll. Moreover, analysts now expect interest rates to peak at 7.25% in Q1 23, 50bps higher than in the previous poll.

The Bureau of Economic Research warned on Monday that a recent trend among industries to implement or promise above-inflation wage hikes could push the South African Reserve Bank (SARB) to go even higher with rates, warning of a 75bps hike at the next meeting.

Speaking to ENCA, SARB governor Lesetja Kganyago unpacked the challenges South Africa currently faces in terms of its economy and why South Africans will still have to feel the pinch for a little while longer.

“If you allow inflation to rise, you are going to have to need higher interest rates so what we are seeing is an effort by the central bank to say we have got to deal with inflation – take the pain now, failure of which will mean more pain later,” said Kganyago.

The Reserve Bank governor outlines three major factors that are hitting South Africans right now and keeping inflation pressure high.

Stage 4 blackouts

A modern economy needs reliable energy, said Kganyago. The bulk of the country’s problems in terms of low growth relate to the constraints on the economy, like the electricity crisis, he said.

The governor said that if it were not for load shedding, South Africa’s annual growth would be almost 2.6% instead of the predicted 1.9% for this year. He added that load shedding has a direct effect on business.

Businesses end up footing the bill to enable their normal operations to take place. This, however, is ‘dead weight loss’ and adds to the expenditure of businesses making it more costly to do business.

In terms of inflation and load shedding, Kganyago said that load shedding had been priced into the economy with higher tariffs being asked consistently since 2008 – feeding into inflation.

Power utility Eskom recently pushed load shedding to Stage 4 on 18 October following generator breakdowns. Load shedding is expected to continue through the coming weekend.

Price spiral

Strike action, as seen at the national port and freight company Transnet over the last week, plays into inflation further, with an increase in wage demands driving it up.

Kganyago said that it is important that inflation be tamed with rate hikes so as to give workers less opportunity to ask for above-inflation wage demands. Failure to contain wage hikes could lead to a price spiral: higher wages lead to more spending, driving up inflation and delivering higher prices.

He said that there had been a positive trend emerging that workers are only asking for inflationary raises. However, several sectors have already buckled to labour demands and implemented above-inflation increases.

In September, the deputy governor of the SARB, Rashid Cassim said that the risk of a spiral – where price-setters build higher prices in and demand for wages goes up – increases if inflation is not brought within its target range.

The Reserve Bank said that if striking workers are successful in their wage negotiations and salary increases are not compensated for by productivity gains; this will drive inflation up, causing the price spiral.

This could prolong the period by which inflation stays high, requiring the central bank to do more to bring it down.


A possible greylisting is something South Africa must avoid at all costs, Kganyago said.

“If the country is greylisted – foreign financial institutions are going to have to do enhanced due diligence on South African customers and South African financial counterparts… that means they will have to spend more resources doing background checks of clients and are incurring costs and pass costs back to South Africans.”

Kganyago opposed the view put forward by some economists that it could be a good thing for South Africa, forcing us to reevaluate our money laundering regulations. He argued that the costs are broader and not insignificant.

The net impact for consumers is that it will be more difficult for the businesses they transact with to fulfil obligations – like importing products or doing other international transactions – which will impact sentiment and consumer confidence.

Greylisting could be the wake-up call South Africa needs

Last year, the international financial watchdog, the Financial Action Task Force (FATF), found gaps in critical financial legislation that resulted in abuse and criminal activity.

The task force has given South Africa until the end of this month, in October, to demonstrate that the government has adopted the necessary measures. In February 2023, a decision will be made regarding whether or not to add the nation to the list.

Read: Petrol prices in South Africa under review

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