SA’s next inflation release and the Reserve Bank’s May interest rate decision are both due this week and with more bad news likely, the risk is growing that SA is headed for a hard landing.
It is hard not to despair about SA. Sheer incompetence, corruption and hubris have destroyed our growth prospects through rolling blackouts, soaring crime, and collapsing infrastructure, and now to top it all — international disapprobation.
The rand reflected all this when it peaked at R19.52/$ on May 11 — the day the US openly accused SA of selling arms to Russia. SA has strenuously denied the claim. Well, we may not technically have been loading arms on to a Russian ship in the middle of the night, maybe it was Marmite, but with the rand still at R19.45/$ almost two weeks later, the damage has been done.
Spare a thought for Reserve Bank governor Lesetja Kganyago and the rest of the monetary policy committee (MPC) who are thoroughly backed into a corner. They are likely to be forced by extreme rand weakness to hike the repo rate by another 50 basis points on Thursday, despite knowing that consumers are buckling.
They euphemistically describe their position — of having to keep hiking rates into a stalled economy — as a monetary policy “conundrum”. It is a conundrum because the Bank must hike knowing it will further dampen growth, but if it does not hike to shore up the rand it will be inviting even higher inflation (through the rising cost of imports), which is also bad for growth and hurts the poor the most.
By not hiking, the Bank would also risk its own credibility as an inflation fighter. Credibility — the population’s belief that the Bank will do whatever is necessary to curb inflation — is one of the most important weapons at its disposal.
It works like this: if price-setters believe the MPC is loaded with hawks just itching to hike rates, they will be less gung-ho about passing on price increases. It means that a credible central bank will not need to hike rates as much as might otherwise be necessary — the mere fear that it will do so may be enough to keep a lid on pricing behaviour and tame rising inflation expectations.
In SA’s case, with an inflation target of 4.5% but headline consumer inflation (CPI) sticky at about 7%, and inflation expectations having drifted sharply upwards towards 6%, the Bank must show its hawkish side to reanchor inflation expectations, or they will become self-fulfilling. If that happens, all the gains the Bank has made over the past five years in anchoring inflation at about 4.5% will have been undone.
The infuriating thing is that had the government had the nous to fix SA’s energy and logistics crises, not cosy up to Russia, and not allow the country to be greylisted by the Financial Action Task Force, we would have both higher growth and lower inflation by now.
Yes, many other countries are experiencing the twin misery of low growth/high inflation but elsewhere inflation has started to come off more rapidly, whereas in SA, load-shedding and the weak rand are fuelling inflation while curbing growth simultaneously — the worst of both worlds.
The Bank expects the drag from load-shedding and logistics constraints to reduce real GDP growth by a substantial two percentage points in 2023 to a mere 0.2% year on year. At the same time, load-shedding will add 0.5 percentage points to the consumer price index (CPI) as firms seek to pass the high cost of installing solar systems and diesel generators on to consumers.
As Kganyago likes to say, SA is “suffering from largely self-inflicted wounds”. So, when the Bank hikes rates again this week, be angry — just not at the Bank. Though the pain it will feel in having to hike again may be masked in hawkish central bank speak, it is just as exasperated as the rest of us.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.