The South African Reserve Bank may be gaining the upper hand on inflation, but risks, including power outages that add to the costs of food production and doing business, mean Governor Lesetja Kganyago is reluctant to pivot away from policy tightening.<\/p>\n
While the monetary policy committee moved closer to ending its hiking cycle when it lifted borrowing costs by 25 basis points to 7.25% on Thursday \u2014 the smallest increase in five meetings \u2014 it maintained a hawkish stance as it sought to anchor price-growth expectations more firmly around the 4.5% midpoint of its target band.<\/p>\n
The rate of price growth has breached the 6% upper limit of its target for seven straight months and is only seen firmly back at the midpoint from the second half of 2024.<\/p>\n
\u201cInflation is a problem: South Africans have expressed discomfort with the fact that inflation is eating into their incomes,\u201d Kganyago told reporters at a press conference north of Johannesburg on Thursday.<\/p>\n
\u201cYou can rest assured that this central bank means business about price stability.\u201d<\/p>\n
The MPC has front-loaded its fight against inflation, and the key is rate is now higher than the year-end 2023 level that its quarterly projection model suggests it should be. It doesn\u2019t target an interest rate level and so doesn\u2019t have a particular terminal rate in mind, Kganyago said.<\/p>\n
The lower-than-expected increase \u2014 only six of the 21 economists in a Bloomberg survey predicted the move, with the rest plumbing for a 50-basis-point increase \u2014 saw forward-rate agreements adjust lower as traders reduced bets on further tightening.<\/p>\n
A final interest-rate rise of 25 basis points is likely in March, and any further tightening would be \u201ctoo onerous\u201d for economic growth, said Sanisha Packirisamy, an economist at Momentum Investments.<\/p>\n
The central bank slashed its forecast for economic growth in 2023 to 0.3% from 1.1%. That\u2019s as rolling blackouts, known locally as load shedding, are predicted to shave two percentage points off output growth during the year, according to the central bank\u2019s projections.<\/p>\n
South Africa is suffering its worst-yet electricity rationing, with state-owned company Eskom Holdings SOC Ltd. implementing rolling blackouts on 205 days last year and every day so far in 2023.<\/p>\n
The outages, which are needed to protect the grid from collapse when the utility\u2019s plants can\u2019t meet demand, \u201cmay have broader price effects on the cost of doing business and the cost of living,\u201d Kganyago said.<\/p>\n
Political Pressure<\/strong><\/p>\n The South African Reserve Bank has now delivered 375 basis points of tightening since November 2021.<\/p>\n Its stance, in response to the worst global inflation shock in a generation, has meant the country hasn\u2019t experienced target misses on the scale that some African and developed-market nations have. Interest-rate increases haven\u2019t been as large as in some other emerging markets.<\/p>\n Still, it\u2019s likely to draw further criticism from detractors, including senior members of the governing African National Congress that want to change its mandate to include economic growth and job creation.<\/p>\n With the economy stuck in its longest downward cycle since World War II and the ANC failing to meet its targeted jobless rate of 14% by 2020, opinion polls show it risks losing its national majority in elections scheduled for 2024.<\/p>\n Central banks aren\u2019t designed to shape the way labour markets should work, Kganyago said. If the Reserve Bank is given an employment mandate, it would need a say on how the job market functions \u201cotherwise you\u2019ll be setting us up to fail\u201d.<\/p>\n Amending the central bank\u2019s mandate would require changing the constitution, something the ANC would need support from opposition parties to do. \u201cIt\u2019s not like these experiments have not been tried elsewhere,\u201d Kganyago said. \u201cUnorthodox policies have led to exactly orthodox outcomes. High inflation is not a growth strategy.\u201d<\/p>\n
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