The Reserve Bank expects domestic inflation to be contained at about 4.5% over the next two years in the absence of any shocks, governor Lesetja Kganyago said Wednesday in comments that might cement market forecasts of local interest rates remaining at historic lows.
Inflation expectations appeared well anchored around the midpoint of the central bank’s 3%-6% inflation target range and the picture looked “promising”, Kganyago said. In the wake of the Covid-19 pandemic and lockdown restrictions imposed in 2020, the Bank responded by cutting the repo rate by 275 basis points to the current 3.5%, the benchmark rate’s lowest level in about five decades, as it sought to support an economy that shrank by 7% in 2020 — the worst performance in about a century.
Kganyago’s statement in parliament coincided with a report that shows inflation slowed in July to an annualised 4.6%, from 4.9% in June, moving close to the midpoint of the target after spiking to 5.2% in May. That reading was impacted by the base effects arising from the economy being virtually closed in same period in 2020 and as a result of sharply lower fuel prices.
Inflation was not a big concern for SA, Kganyago told a finance committee briefing, though he pointed to risks including rising fuel prices and accelerating food inflation. The latter had, however, been contained in SA due to the good performance of the agricultural sector.
Lower services inflation had also helped keep core inflation — which excludes food and energy costs — subdued, thanks largely to lower housing costs.
Another risk, Kganyago said, was increasing administrative prices such as water and electricity tariffs and, more worryingly, local government rates and taxes, These, together with electricity tariffs, have been rising faster than the inflation rate.
The Bank sees the economy recovering to 2019 levels only in 2023, with GDP set to expand by just over 4% in 2021. After its most recent monetary policy committee meeting, the Bank said widespread looting and economic destruction in KwaZulu-Natal and Gauteng in July had prevented it from upgrading its full-year forecast after a strong performance earlier in 2021. The cost of the violence could result in an economic contraction in the third quarter, Kganyago said on Tuesday.
The Bank expects the unrest to shave 0.4% off annual growth in 2021, compared with an average 0.5% reduction forecast by various other institutions.
The governor highlighted various risks to an economic recovery, including continued disruptions to electricity supply, further waves of Covid-19, and the lasting effects of the unrest on investment due to lower business confidence. A faster-than-expected acceleration in inflation might necessitate a change in monetary policy, while a sharp correction in commodity prices could lead to a deterioration in public finances, Kganyago said.
Kganyago stressed that the current commodity boom should be seen as a temporary phenomenon. Commodities have been at the centre of SA’s recovery so far this year, which have been buoyed by the strong global recovery. This had driven nominal GDP, which has rebounded strongly, supporting tax revenue.
But the governor said the economic recovery had been uneven, with slow growth in labour-intensive sectors which were significantly affected by the Covid-19 lockdowns. Employment recovery remained weak and is lagging the recovery of GDP.
Exports had recovered strongly and the rand had been one of the strongest emerging market currencies this year, second only to Argentina. The robust terms of trade had supported the current account.
We expect that this year SA will continue to run a significant current account surplus,” Kganyago said, but cautioned that it could shift into a deficit in 2022.
ensorl@businesslive.co.za
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