The ‘sticky’ issue the Reserve Bank just can’t shake

 ·28 Jun 2023

The South African Reserve Bank (SARB) says that underlying inflation has risen strongly over the past year and is expected to remain sticky over the coming months.

In its latest annual report for 2022/23, the central bank said that expectations of future inflation had shifted sharply higher over the past six months.

As of May, consumer price inflation is sitting at 6.3%, still above the target range of between 3% and 6%. This is despite efforts from the SARB to curb inflation by raising interest rates.

The bank has hiked rates in ten consecutive meetings since November 2021, adding 475 basis points in the cycle. The Monetary Policy Council (MPC) has lifted the repo rate from a historic low of 3.5% in November 2021 to the current 8.25%.

The bank said its most recent 50 basis point hike in May 2023 marked monetary policy only now reaching restrictive territory.

“Despite nominal policy adjustments, repeated upward inflation surprises have, as in much of the world, implied less tightening than expected at the time of policy adjustment,” reported the SARB.

“The persistence of inflation has undermined the long-run effectiveness of policy. Monetary policy operates with a long lag of approximately 12 to 24 months, with peak impacts of rate hikes between three and five quarters ahead.

“This means monetary policy decisions must be forward-looking and seek to prevent second-round effects and the risk that inflation expectations de-anchor following inflation shocks.”

The SARB said actions taken are expected to moderate expectations of future inflation through the commitment to returning inflation to the target over the medium term.

Failing to decisively deal with inflation as soon as possible carries with it more challenges to the economy down the line, noted the bank.

Domestic inflation’s trajectory is very much linked to the economic growth of South Africa, which remains stifled by the usual suspects: an unstable energy supply as well as a failing national logistics company contributing to supply constraints.

The future of interest rates in South Africa is, however, unclear, with local perspectives both arguing for a possible curtailment and others stating the cycle will continue.

Economic outlook

A series of growing headwinds have held back economic growth in South Africa, despite the economy growing a moderate 2% in 2022.

The SARB said the primary issue among the various headwinds remains the intensification of load shedding in the fourth quarter of last year, which in addition to preventing better economic growth outcomes for the year, further heralded a weak start to 2023.

“By the SARB’s January meeting of its MPC, the forecast for GDP growth for this year was revised down sharply to 0.2%, with 0.7% projected for 2024. These forecasts have since been revised up, to 0.3% and 1.0% by the time of the May meeting but continue to reflect an economy struggling to find its feet,” said the SARB

“More load-shedding, logistics blockages and lower productivity and income growth pose the biggest downside risks to our outlook for near- and medium-term growth,” the bank added.

Read: Dark turn for interest rates

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