Big interest rate shift on the cards for South Africa

 ·5 Apr 2024

The South African Reserve Bank (SARB) has reiterated its intentions to review the country’s current inflation target range, with governor Lesetja Kganyago pointing to the need for a narrower, lower range.

Introduced in 2000, the SARB’s target range is currently set at 3% to 6%. The Monetary Policy Committee (MPC) is looking for inflation to settle around the midpoint (i.e., 4.5%) to determine adjustments to interest rates.

Kganyango has maintained for months that the central bank will not make any policy adjustments – especially rate cuts – until inflation has been tamed and brought under control, stabilised at this mid-point.

However, the Bureau for Economic Research (BER) said in a note this week that the SARB is pushing for a significant shift for the range.

In an interview, Kganyago told Reuters that he would prefer to establish a lower inflation target before 2025, the BER noted.

“A team of policymakers, comprising the SARB and the National Treasury, are busy identifying the appropriate range and the associated risks,” it said.

“Along with identifying the risks, the team must advise the governor on the appropriate timeline for achieving the target.”

The BER said there had been plans to gradually lower the target since its inception in 2000, first taking it to 3% to 5%, and eventually to 2% to 4%.

“The governor feels it was a mistake that the target was never lowered. The SARB currently has an objective of 4.5% – the midpoint of the 3-6% target – but expressed that it would prefer to see inflation at 3%,” the BER said.

Impact on interest rates

Moving the inflation target band before 2025 raises serious questions about the policy moves South Africans can expect in 2024.

Based on the current inflation projections—and the current 4.5% target—the SARB’s forecasts see 50 basis point rate cuts this year (down from previous forecasts of 75 basis points), likely in the last two meetings of the year (September and November).

However, if the inflation target is lowered to 3% or 4%, the wait for a turn in the cutting cycle may be even longer.

Inflation has been on an upward trajectory in the first quarter of 2024 so far, driven by higher fuel prices and other cost-of-living pressures. While this is expected to ease in the latter half of the year, it may not be enough to meet the mid-point target.

The BER noted that Headline Inflation was 5.6% year over year in February, and the SARB forecasts it to slow to 4.5% only in 2025Q4.

In addition, other inflationary pressures are cropping up – most notably the risk of higher food inflation due to drought conditions and extreme weather events, as well as a more recent five-year wage agreement in the mining sector that has come in above inflation forecasts.

“The SARB often flags real wage increases that exceed productivity growth as an upside risk to the inflation outlook,” the BER said.

Read: Investors turn sour on South Africa

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