Inflation is set to remain close to the Reserve Bank’s target of 4.5%, declining to an average of just above 3% in a best-case scenario where the rand continues to strengthen over the next couple of years. This could potentially lead to a decrease of two percentage points in interest rates over the period.
In its latest Monetary Policy Review the Bank has disclosed the upside and downside scenarios it considered when it made its decision to cut interest rates in September. It makes it clear as it did in September that it regards the risks to its baseline forecasts as “balanced”, but the scenarios could raise fresh questions about whether it is keeping interest rates too restrictive — and whether its real intention is to get inflation right down to the level at which it can make a strong case for a lower target.
Governor Lesetja Kganyago has long argued for a lower inflation target, of perhaps 3%, to align SA with its emerging-market peers and enhance its economic competitiveness. Maintaining inflation in that range could strengthen the argument for reducing the target from the current official range of 3%-6%.
With the rand strengthening, food and fuel prices moderating and core inflation improving, the Bank’s September baseline forecast was already much improved compared with earlier in 2024. It’s now expected to average 4.6% this year, down from the 5.1% forecast in March, and to undershoot the 4.5% midpoint of the target range over the medium term.
The Bank also upped its growth forecast to 1.1% for 2024, rising to 1.8% next year, though the review points out this is still well below SA’s “steady state” level of 2.5%.
But the scenarios show that even in a downside scenario, in which electricity prices, wages and rentals rise faster than expected, the average inflation rate is still below 5% for the next three years, at 4.7% in 2024, 4.5% in 2025 and rising to 4.8% in 2026.
In the upside scenario, in which the rand appreciates 24% over the period, the average inflation rate comes down to 3.4% in 2025 and 3.2% in 2026. That upside scenario implies the benchmark repo rate would be 5.99% by the end of the period, down from 8% now — which would imply much larger cumulative cuts than the 75 basis points to 100 basis points (bps) most economists now predict.
The review states that inflation expectations, which the Bank closely watches as a guide to how price setters such as businesses and trade unions will behave, have eased appreciably in 2024. “The SARB policy actions, consistency in communications and credibility may have helped to reverse the de-anchoring of inflation expectations, minimising any costs of sustainably achieving the inflation target over the medium term. Nevertheless, the task of firmly anchoring expectations is not yet complete,” it said.
And while it highlighted the improvements in SA’s financial market conditions, which have seen the long end of the yield curve shift by 200bps since April this year, it pointed again to SA’s poor economic growth record compared with its emerging-market peer group, which grew by an average 4.1% in 2023 while SA’s economy expanded by just 0.7%.
As Business Day reported earlier in 2024, the Bank’s estimates are that the introduction of the two-pot retirement system in a moderate (likely) scenario could see R40bn withdrawn in the fourth quarter of 2024 and R20bn a year thereafter, adding just 0.1 and 0.3 percentage points to economic growth in the next two years.
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