The Reserve Bank is walking a tightrope

 ·28 Jul 2023

South Africa’s central bank faces the difficult task of ensuring that its fight against inflation does not tank the economy.

South African consumers were given some relief last week when the South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) held interest rates where they were – keeping the repo rate at 8.25% after ten consecutive rate hikes.

The MPC kept rates on hold as inflation eased, with Consumer Price Inflation dropping from 6.3% in May to 5.4% in June. This was in the SARB’s target range of 3%-6%.

However, Governor Lesetja Kganyago strongly indicated that South Africa has not reached the end of its rate hiking cycle, with the SARB still looking to see what will happen with inflation.

Deloitte’s South Africa economic outlook for July said that the SARB will have a hard job ensuring that its fight against inflation does not limit economic growth.

“While the tighter-for-longer policy is likely to support the further easing of inflation, it could potentially delay any significant uptick in growth,” the outlook said.

“In the light of this, the Reserve Bank has to walk a tightrope of finding the right balance between stabilizing prices, which would reduce pressure for low-income households, and helping with stimulating economic growth through lower interest rates in an economic environment subject to a range of challenges, most notably deep structural constraints to growth.”

Will they, won’t they

Economists remain divided on whether the SARB will continue to hike rates – with some accusing the central bank of having lost the plot entirely.

Dr Francois Stofberg from Efficient Wealth said that South Africa’s interest rate trajectory is heavily influenced by what happens in the US.

Earlier this week, Stofberg said that the US Federal Reserve would likely hike interest rates by 25 basis points, which it did, with another potential rate hike on the cards before the end of the year.

He said that the SARB would thus likely raise interest rates, despite little evidence showing that it will bring in investment.

“The SARB will, most likely, feel obligated to increase rates too, even though there is little evidence to support their conviction that higher interest rates in South Africa can attract short-term capital towards SA in this environment,” he said.

“If conditions were different, their plan might have worked but not in the current uncertain global environment.”

Investec Chief Economist Annabel Bishop said that the US Fed would likely remain hawkish as it tries to contain inflation expectations but noted that South African consumers would likely not be subjected to further rate hikes this year.

“Looking forward, South Africa’s forward rate agreement (FRA) curve has not factored in an interest rate hike for July – not even a 25 basis point lift. No hikes are expected for the rest of this year either, tying in with our expectation of no more hikes in the South African interest rate cycle,” Bishop said.

Read: This is how much South Africa’s middle class spends on groceries

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