The Reserve Bank reaffirmed its policy stance on Tuesday, with governor Lesetja Kganyago saying it remains focused on anchoring inflation at the midpoint of the 3%-6% target range, but currency weakness, more debt, lower capital flows and “less co-operation” from fiscal authorities make this difficult.
Kganyago was speaking at the release of the monetary policy review, which provides a detailed analysis of the domestic and global macro issues that underpin the deliberations and policy positions of the monetary policy committee.
Kganyago’s warning comes two weeks before finance minister Enoch Godongwana presents his medium-term budget policy statement in parliament on November 1.
Godongwana faced calls from more than 100 academics, economists, professionals and civil society organisations to halt all planned budget cuts as SA faces a deteriorating fiscal position. The minister said that budget cuts would be below the underspending of R28bn by all spheres of government in 2022/23. In 2021/22, government underspending amounted to R36bn.
He said the Treasury has had to be careful about how it deals with budget cuts.
The Bank is slightly more optimistic than earlier in 2023 about SA’s growth projections, forecasting growth of 0.7% on stronger-than-expected investment and continued spending.
The Bank’s head of economic research, Chris Loewald, said slower domestic growth, alongside the reversal in commodity revenue windfalls, has worsened the budget deficit and debt-to-GDP ratio.
“Spending pressures are evident in the larger-than-budgeted wage growth this year and the financial needs of struggling state-owned enterprises, among other factors,” he said. “Alongside higher investment and sustained spending, the fall in SA’s terms of trade back to about prepandemic levels is reflected in a broad deterioration in the current account, which has now moved firmly back into deficit.”
Loewald said sustainable fiscal positions would help to reduce the high interest burdens many economies face, lowering sovereign credit default risk and term premiums.
“Lower risk premiums support continued capital flows into savings-deficit economies, supporting domestic currencies and reducing exchange rate pass-through and inflation.”
The Bank has raised interest rates a cumulative 475 basis points since normalisation began in November 2021.
It hiked the repo rate just once since the most recent monetary policy review in April, taking the rate to 8.25% and moving the policy stance into “restrictive” territory. But the nature of the risks to the inflation outlook and perhaps some of the risk factors may result in further monetary policy tightening.
Loewald said despite global headline inflation slowing significantly over the period under review, risks linger, especially from oil and weather-related food price developments.
“The enduring stickiness in core inflation, alongside the gradual fragmenting of global trade and finance networks, suggests upward revisions to global neutral interest rates. Monetary policy will remain focused on returning inflation to targeted levels across most economies,” he said.
SA has grappled with persistently high inflation and subdued growth, mirroring the experience of much of the world.
The headline inflation target breach has been prolonged, remaining above the midpoint of the target range from May 2021 and outside the target range for 13 consecutive months from May 2022 until June 2023.
Over the past year, the trajectory of headline inflation was shaped primarily by fuel, food and electricity prices, with the former two largely reflecting global developments and currency movements. Headline inflation reached 4.7% year on year in July before lifting slightly to 4.8% in August.
The Bank said that in line with the resurgence in Brent crude oil prices, headline inflation is expected to trend broadly sideways into early 2024 before declining towards the midpoint of the target range.
The current forecast is for inflation to average 5.9% in 2023 and to decline to 5.1% in 2024 before settling at the midpoint in 2025, Loewald said.
He added for much of the period under review, underlying inflation, as measured by core and trimmed mean inflation, was wedged in the 5%-6% range, primarily reflecting markedly higher global goods inflation, worsened in part by the weaker rand exchange rate.
“Inflationary pressures have also broadened within the core basket, reflecting spillover and second-round effects, as well as the pass-through of costs associated with electricity self-generation,” he said.
Loewald warned that other upside risks have strengthened in recent months, heightening uncertainty about the precise path for inflation.
Oil prices have risen sharply, from an average of $80 a barrel in the first half of the year to above $90 in September.
Inflation expectations, though moderating, remain elevated and with the increased intensity of load-shedding, could feed into wages and prices, he said.
Bank deputy governor Rashad Cassim warned that with elevated inflation risks and stubborn core inflation, alongside heightened uncertainty about the path for global neutral interest rates, policy rates are expected to remain higher for longer. Cassim said a rise in the global neutral rates would require policy rates to either increase or remain higher for longer, particularly in emerging markets.
“The outlook for global growth is laden with risks. Stubbornly high core inflation in major advanced economies driven by services prices, with tight labour markets and the recent surge in Brent crude oil prices, could keep inflation and ultimately interest rates higher for longer,” Cassim said.
It presents challenges to emerging markets that require global savings inflows and threatens currency stability, with knock-on effects to domestic inflation.
Update: October 17 2023
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