The SA Reserve Bank (SARB) will keep raising rates because it is worried about the inflationary impact of a weaker rand, Reserve Bank deputy governor Fundi Tshazibana said on Thursday.
“Although exchange rate dynamics are always unpredictable, the SARB’s baseline forecast is that we are seeing some exchange rate pressure to inflation, but timely rate increases keep this from being a major source of pressure,” said Tshazibana in remarks at a conference hosted by Nedbank’s asset management arm in Johannesburg.
The high inflation, mainly from rising fuel and food prices, is largely driven by developed markets, with international food prices a key contributor to local food costs. This is because SA is a price taker for most agricultural food produced through either import or export parity pricing — the price that a purchaser pays, or can expect to pay, for imported goods.
The local unit has lost more than 14% against the dollar since the start of the second quarter in April. It has been hurt, albeit to a far lesser extent, by softer international commodity prices, disappointing domestic retail sales data and concerns over finance minister Enoch Godongwana after sexual assault accusations.
“We are no longer in the space where we can have low policy rates without currency weakness. There are too many other countries offering higher policy rates, and we are getting less support from export commodity prices than we did previously,” Tshazibana said.
Even so, SA has a reasonable chance of emerging from the global inflation shock without higher interest rates, Tshazibana said, adding that the country’s resilience during this “stress period” was because the central bank has not been as “adventurous” as some global counterparts.
“It is still early days, and I don’t want to signal complacency, but given the size of the global shock under way, it is fortunate that SA has a good chance of getting through this without particularly high inflation or high interest rates,” she said.
Her comments came a day after data showed on Wednesday SA inflation had hit a 13-year high, accelerating to 7.8% in July from June’s already high 7.4%, well above the Bank’s 3%-6% target range.
But the Bank’s July Quarterly Projection Model, a broad policy guide, showed inflation peaking in the third quarter, and moving back towards the midpoint target during the rest of forecast period, Tshazibana told delegates. She added that the model also suggested moderate increases in rate moves.
The Bank started the tightening cycle in November, lifting the benchmark rates by a cumulative 200 basis points to 5.5% — not far from the same levels before the pandemic triggered interest rates cuts to support the economy battered by lockdown restrictions.
“I hope you have all taken time to appreciate the fact that SA’s inflation has been below the inflation rates of the US, the UK and even Germany, in recent month,” said Tshazibana.
“Perhaps more relevant, we have not seen target misses of the scale experienced by many of our peers, and unlike those countries, we have not had to raise rates well into restrictive territory. The SARB is not happy about our target breach, but given what is happening to the world, neither our inflation rate nor our interest rates look especially onerous.”
Aside from the higher commodity prices, she said the reason SA is able to withstand “this stress episode” is because the Bank did not follow in the footsteps of other centrals banks in the months and years leading to inflation shooting through the roof.
“I realise that despite the criticisms — we at the SARB are sometimes attacked for not being adventurous — it is clear that when central banks do become adventurous the consequences can be even more unpopular,” she said.
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