Reserve bank shoots itself in the foot: report
While economists expect the South African Reserve Bank (SARB) to keep interest rates steady on Thursday and start cutting early next year, some are concerned that trust in the Bank may have slipped – meaning the rate could stay higher for longer.
Speaking with Business Times, seasoned economist Dawie Roodt said there are two mechanisms that the SARB uses that impact inflation in South Africa.
The first is the mechanical process of increasing rates and making money more expensive to push borrowing down, while the other is known as open-mouth policy, which forces inflation expectations down by getting people to expect hikes – influencing people’s money decisions, said Roodt.
“Whenever the governor opens his mouth, he tries to convince people that the MPC is fighting inflation, [and so] the less the public has to rely on [the] actual hiking [of] rates. Some say inflation expectations are falling, so the Reserve Bank is also succeeding in this regard,” he added.
Several economists expect the Bank’s monetary policy committee (MPC) to keep the repo rate steady this week and start cutting in early 2024. Roodt agreed with this and said, “The SARB may do nothing, for now, besides its open-mouth policy”.
However, he noted that there is also a political challenge that affects the open-mouth policy – which could push expected interest rate relief further into 2024.
“Recently, the Reserve Bank found the president not guilty of the Phala Phala scandal. People must trust the Bank so that the open-mouth policy can move people’s behaviour and drive inflation down. Although I am a fan of the Bank and the governor, this report was a whitewash,” said Roodt.
He added this politically uncertain stance from the SARB may influence the Bank’s MPC decision in early 2024.
Roodt said early next year would be an opportunity to cut rates before the elections, but this would raise questions of whether it was being done because the economy could afford it or if it was playing to the political gallery.
Interest rate expectations
According to PwC’s Economic Outlook report, the group expects the SARB Monetary Policy Committee (MPC) to hold on rates when it meets on Thursday (21 September) and again when it meets for the last time in 2023 in November.
If favourable economic conditions – like lower inflation – persist, the country could start seeing rate cuts in 2024, with around 200 basis points coming off the repo rate by the end of 2025.
However, fuel price pressures on producers, a weak rand, dry weather, and load shedding threaten inflation in South Africa in the near term, which could also impact the SARB’s decision in early 2024.
According to Investec Chief Economist Annabel Bishop, fuel prices do not have that much of a direct influence on inflation. However, Petrol prices account for 3.5% of the CPI basket, while diesel prices only account for 1.4%, she said.
“The lower weighting of the diesel sub-component will have some moderating effect but still place upward pressure on the September CPI outcome,” she added.
She added that South African prices could have also benefited from the decline in international agricultural commodity food prices, but the rand’s decline eliminated this benefit.
Investec has also predicted that inflation will hit 4.6% in 2024, as risks to food price inflation persist due to the El Nino weather pattern – which brings dry weather conditions to South Africa – and the costs of load shedding.
CPI inflation in 2023 is likely to come out below 6.0% – potentially below 5.8%, while inflation is expected to be closer to the 4.5% midpoint in 2025 and 2026, but there is still pressure that it could move back to 5.0%.
Many South Africans expect an end to the Reserve Bank’s interest rate hiking cycle, but governor Lesetja Kganyago says it is too soon to let up on its inflation-targeting approach.
This comes after inflation fell to 4.7% year-on-year in July from 5.4% in June. Still, Kganyago said that while the figure indicates food prices will eventually come down, core goods inflation remained elevated at close to 6%.
Core goods inflation relates to the cost of goods and services excluding those from the food and energy sectors due to the price volatility of those goods.
Kganyago added that inflation was showing signs of falling in various markets, but central banks worldwide could not afford to be complacent or relax their policy stance, reported Business Times.
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