The South African Reserve Bank (SARB) forecasts that headline inflation will reach 4.5% in the second quarter of next year, holding out the possibility that the rate-cutting cycle could start earlier than previously expected.
At the same time, SARB Governor Lesetja Kganyago made it clear the bank is not yet done with taming inflation.
As was widely expected, the bank’s Monetary Policy Committee (MPC) kept the repo rate steady at 8.25% when it met on Thursday last week. The decision was unanimous.
The expectation by business and labour that inflation will remain high – and will therefore continue to set prices and remuneration at levels above 4.5% – requires the SARB to “deliver on our target sooner rather than later, to re-anchor expectations”, the MPC said in a statement after its meeting.
At its meeting in March, the SARB forecast that inflation would reach the midpoint of its target range of 3% to 6% at the end of 2025. The MPC’s statement said the bank now sees inflation stabilising at 4.5% in the second quarter of 2025.
“The changes to the outlook, however, are not large when compared to our March forecast. Average inflation for 2025 is only a tenth of a percentage point lower. The task of achieving our inflation objective is not yet done.”
A key message of the MPC’s statement and Kganyago’s subsequent engagement with the media is that the SARB sees the risks to its inflation forecast to be “broadly balanced”. By this the bank means it cannot, at this stage, make a call on whether the risks will abate or strengthen.
The risks the SARB is monitoring are the impact of the El Niño climate pattern on maize and grain prices, the oil price, the volatility of the exchange rate, whether major central banks – particularly the United States Federal Reserve – will ease their rates, and whether protectionist trade policies will take hold.
Kganyago emphasised that each of these risks contains “a number of moving parts”, and it was unclear how they will play out and affect the outlook for inflation in South Africa.
SARB committed to fighting inflation
In response to a question during the media briefing, Kganyago said the SARB will remain committed to fighting inflation even if a new government’s introduced policies that result in more spending and a higher deficit.
It was becoming clear, when the governor released the MPC’s statement on Thursday afternoon, that the ANC was set to lose its majority and may form a coalition government.
“When you are faced with a situation where monetary policy has to do the weightlifting to try and support growth and, in the process, keep its eye off inflation and generate inflation surprises, economists call that fiscal dominance,” he said.
“Fiscal dominance” is where a central bank’s monetary policy decisions are heavily influenced or constrained by a government’s fiscal policy and budget requirements. This limits the central bank’s ability to achieve its own inflation and economic goals. In such a scenario, the central bank’s actions, especially in terms of setting interest rates and controlling inflation, become subordinate to the government’s fiscal needs. This typically happens when a government runs large budget deficits and accumulates significant debt.
“And if we were to enter the era of fiscal dominance, the only protection you have against fiscal dominance is an independent central bank with a clear mandate, a clear policy anchor, and with a track record of executing that mandate and pursuing that anchor, and in South Africa you have such. So, if fiscal policy falls in a direction that could undermine macroeconomic stability, it would mean that monetary policy has to do the heavy lifting to deal with inflation because that is the mandate of the central bank,” Kganyago said.
“You have our commitment we will rein in inflation, and we do not believe our policy objective of reining inflation to the midpoint of the inflation target range is done,” he said.
Growth outlook improves
The SARB has revised its estimate of the impact of loadshedding on economic growth this year to 0.5%. It estimates economic growth of 1.2% in 2024. Therefore, if the respite from loadshedding continues, growth could rise to some 1.7%, “all else being equal”, Kganyago said.
When the SARB attempted to calculate the impact of loadshedding, it did not only consider the lack of electricity but also how this fed into sentiment. If the current trajectory of no or minimal loadshedding continues, it might impact positively investor and consumer sentiment, and “it might change the trajectory of many a forecast”, the governor said.
Are high rates working?
He was asked whether the MPC believes its monetary policy decisions are having “any impact” in taming inflation. The repo rate has been kept at 8.25% since May 2023, but inflation remains above 5%.
In response, the governor said inflation peaked at 7.8% in 2022, and it was 5.2% in April. The difference between 7.8% and 5.2% “is not small at all”. Inflation is above 5%, but the monetary policy stance is working because otherwise inflation would not have declined. “Granted, there might be other things that helped to drive inflation down, but without the monetary policy stance, inflation would have continued to climb.”
Kganyago said the SARB started to hike rates in 2021, and “of course we could have decided to do everything at once […] but that’s not how policy is executed. You take steps, and you continuously evaluate the effectiveness of the policy stance that you have taken, and that is exactly what we have done.”
Impact of the two-pot regime
He was asked about the potential impact of the two-pot retirement system, which takes effect on 1 September. Has the SARB estimated the flows into the economy resulting from retirement fund members withdrawing from their savings components (pots), and whether the bank has any concerns about the impact of these withdrawals on financial stability.
Kganyago said too many variables were at play to estimate flows into the economy – how many members will make withdrawals, the total amount that will be withdrawn, and whether members will use the money to fund consumption or pay down debt.
He said the SARB has not detected that withdrawals will have implications for financial stability. He believed the limit on the initial amount (seeding) that will be available to withdraw on 1 September – 10% of a member’s vested savings capped at R30 000 – will ensure the sustainability of retirement funds.
