Room for more interest rate hikes in South Africa: Kganyago

Interest rate hikes will keep coming until inflation is contained within its target range, says Lesetja Kganyago, the governor of the South African Reserve Bank (SARB).

Speaking to CNBC Africa, Kganyago said that in light of inflation expectations creeping up slowly, it is the duty of the central bank to remain on top of it.

The governor pointed to recent inflationary statistics from the Bureau of Economic Research (BER) as reasoning for more hikes, with all social groups (analysts, business people and trade union officials) revising their forecasts for 2023 upwards.

“The upward revision increased from an average of 0.1% pts for 2022 to 0.2% pts for 2023 and 0.3% pts for 2024. The only exception was analysts, who kept their expectations for 2023 unchanged,” reported the BER.

Summarily, inflation is expected to stay higher for longer, with 2023 expectations rising from 5.9% to 6.1%.

The SARB’s Monetary Policy Committee (MPC) will meet next week to consider what is in store for interest rates in South Africa – with a final decision to be announced on Thursday, 26 January.

Inflation outlooks from multiple analysts all point to them being exposed to upside risks, namely, electricity tariffs, a vulnerable rand and fluctuating global oil prices.

The BER said that to prevent higher expectations from becoming a reality; the SARB may be forced to increase the interest rate. Kganyago has now affirmed this sentiment.

“We have seen inflation go up like a rocket and down like an escalator (slowly),” said Kganyago. “We need to see it within the target range (3% – 6%).”

When inflation rises, and central banks have to deal with it – governments get worried about it, Kganyago said. However, faced with rising inflation, a central bank must deal with it – acting too late is more costly.

When questioned if the central bank is being too aggressive in hiking rates, Kganyago noted that it is nothing compared to some Latin American countries.

He said that it is also not the central bank inducting recessions through aggressive policy.

“The recession is sitting in not because of central banks. At the height of the pandemic, central banks came to the party and did all they could possibly do, and what we are now faced with is a situation where – I’m sorry to say –  governments have become addicted to cheap money.”

Kganyago said that the Reserve Bank has run a prudent monetary policy framework through the tumultuous economic period and thus gradually assisted the country in recalibrating policy.

He said that rate hikes are currently being felt harder than usual because, as a central bank, it is dealing with a generation of people who are unfamiliar with living in a time of inflation.

One of South Africa’s biggest banks, Nedbank, forecasts a 25bps interest rate hike in January and 25bps in March – with a prime lending rate likely to top off at 11%.

Investec’s chief economist, Annabel Bishop said that the SARB is likely to keep hiking rates to bring it under control.

“With South Africa’s CPI inflation still well above the target and risks to the outlook, the SARB is likely to hike the repo rate again this month, but by 50bps. Inflation is proving slow to subside in South Africa, but this should accelerate in the first half of the year on base effects,” she said.

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