Reserve Bank governor Lesetja Kganyago on Thursday prepared businesses and consumers for higher borrowing costs as he argued that monetary policy remains “accommodative” — and said he will deploy its instruments to tame the monster of inflation.
This paves the way for more hikes in 2023.
The 75 basis point (bps) hike, which moved the repo rate from 6.25% to 7%, was in line with market expectations.
Defending the move, Kganyago told journalists the repo rate still supports credit growth, while at the same time dealing with the inflation that is ravaging the incomes of South Africans.
“This is where we are … the inflation figure [for October] came out at 7.6% and the policy rate will be adjusted with effect [Friday] to 7%. So if you look at today’s inflation, the policy rate
is still negative in real terms,” he said.
“That says the repurchase rate is accommodative.”
He said the headline inflation number was a “surprise” even to the Bank, which had expected prices to have risen by 7.3%.
The repo rate hike comes despite the Bank reducing its GDP growth forecast for 2022 from 1.9% in September to 1.8%.
Kganyago said the Bank now expects GDP growth of 0.4% in the third quarter, even after taking into account the “considerable volatility” in monthly indicators. It has revised fourth-quarter growth down to 0.1%, previously at 0.3%, largely due to record load-shedding.
Not unanimous
The rate decision was not unanimous, with three members of the monetary policy committee (MPC) preferring the announced increase, while two members preferred an increase of 50 bps.
Kganyago said the current stance shows the MPC is looking to anchor inflation and inflation expectations more strongly at 4.5% over the medium term.
Warning that risks of inflation continue to be on the upside, Kganyago said policy normalisation in major economies and slower growth in China have contributed to the depreciation of many emerging-market currencies, including the rand. Local food price inflation was revised up due in part to the weaker exchange rate.
The Bank now forecasts headline inflation for this year slightly higher at 6.7%, from 6.5% at its two previous meetings, and at 5.4% for 2023 from 5.3%. Headline inflation of 4.5% is expected in 2024 (from 4.6%).
He said risks to the inflation outlook include electricity and other administered prices, which continue to present clear medium-term risks, as well as wage expectations, which are highly influenced by high petrol and food price inflation.
“Considerable risk still attaches to the forecast for average salaries,” Kganyago said.
The governor made the argument that domestic inflation
was becoming more broad based and not transitory.
Inflation shocks
“When we saw that inflation was being broad based, we
started to adjust policy in November [2021]. And if you strip out the two items that are said to be driving inflation — the shocks being energy prices and food prices — we still find that core inflation has risen significantly from what we have seen over the last 12-18 months.
“And [on Wednesday] we were surprised when it hit 5%,” he said. “If anyone wanted a measure that inflation is beginning to be broad based, this would be it.”
The implied policy rate path of the central bank’s quarterly projection model, which the MPC uses as a guide rather than a forecast, now indicates its key rate will average 6.3% by the end of the 2022 period — much higher than September’s 5.6% and July’s forecast of 5.61%.
The projections are slightly higher for 2023 at 6.55% from September’s 6.36% but lower for 2024 at 6.71% from September’s 6.76% forecast.
The country’s seventh consecutive rate increase needs to be viewed in a global interest rate context. US consumer inflation eased to the lowest reading since January 2022, which moved the US Fed to slow down the pace of rate hikes.
Investec chief economist Annabel Bishop said while this does not mean the Fed is ready to pause rate hikes within the next few months, it may be willing to scale back rate increases from the current 75 bps in each of the past three meetings to 50 bps, especially given that rates have already increased by 375 bps in 2022, “and interest rates work with a lag”.
Matrix Fund Managers economist Carmen Nel said given the elevated uncertainty in the global and local outlook, as well as concerns around the surprise increase in core inflation, the Reserve Bank seems willing to take the policy stance into restrictive territory, which means that a further interest rate increase at the January meeting should be the base case.
“The size of that increase will depend on how quickly inflation rolls over from the upside surprise in the October release, the details of the [Bureau of Economic Research] quarter four inflation expectations survey results, and the tone of the US Fed statement and press conference in December,” Nel said.
“Given the voting breakdown and the cumulative policy action implemented so far, a 50 bps hike will be the most likely outcome,” she said.
Kganyago told journalists that nothing can be done about the October and September inflation, but this policy decision is to respond to future pressures.
“And this is necessary because South Africans are complaining about the rising cost of living, and it is important that the central bank continues to deploy its instruments to tame the monster of inflation.”
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