South African Reserve Bank governor Lesetja Kganyago. Photo: Waldo Swiegers/Bloomberg/Getty Images
The South African Reserve Bank’s monetary policy committee (MPC) has voted to hike the repo rate by 25 basis points amid higher global inflation. The committee’s decision was not unanimous, with three members voting in favour of a hike with two preferring an unchanged stance.
Delivering the MPC statement on Thursday, Reserve Bank governor Lesetja Kganyago said the decision to lift the repo rate, which affects the cost of borrowing, was not taken in an effort to pre-empt moves by advanced economies to snuff out elevated inflation in their countries.
“We took this move based on our assessment of the domestic and global economic conditions, and our own view of what the inflation and growth outlook will actually look at,” he said.
The MPC’s decision comes a day after South Africa’s latest consumer price index report was released, showing that inflation was unchanged at 5% year on year in October compared with the previous month.
The interest rate call also comes amid far less benign inflation data in advanced economies. Last week, data released by the US Bureau of Labour Statistics showed that inflation stateside surged 6.2% in October from a year ago, marking the fastest annual pace since 1990.
UK inflation also surprised on the upside: on Wednesday, the country’s Office for National Statistics reported that the consumer price index rose 4.2% in the 12 months to October 2021, up from 3.1% in September. The last time the index breached the 4% mark was in October 2011.
Last month the Bank of England kept rates unchanged. But, like its colleagues across the pond, the central bank now may also face pressure to change tack when it next meets. Meanwhile, emerging market economies in Latin America and Europe have already started to hike their rates as a buffer against policy normalisation in the US.
Higher-than-expected inflation in advanced economies has weighed on the South African rand amid fears that central banks will start to roll back accommodative monetary policies. As major economies, like the US and the UK, feel the itch to adjust rates to guard against high inflation, the rand stands to depreciate and domestic inflation will rise.
In the US, the federal open market committee has already decided to begin reducing its bond purchases, which were ramped up to stimulate the economy as it was being weighed down by the Covid-19 pandemic.
The MPC statement noted that, since its September meeting, the rand has depreciated
about 5.9% against the US dollar and now sits below its equilibrium level.
Analysts were split on how the MPC would react to global inflation pressures — induced by supply-chain bottlenecks affecting countries rapidly recovering from the effects of the pandemic — and the risks to the rand.
Some raised concerns that if the Reserve Bank failed to act, South Africa would be behind the curve and the rand would suffer. Others pointed out that inflation had remained within the central bank’s target range of 3% to 6% and that the country’s subdued economic recovery would likely keep inflation in check.
The Reserve Bank has revised its headline inflation forecast for the fourth quarter up from 5% to 5.3%, which is uncomfortably close to the upper band of the central bank’s target. Under Kganyago, the bank has managed to anchor inflation expectations to the target’s midpoint of 4.5%.
“The risks to the short-term inflation outlook are assessed to the upside,” Thursday’s MPC statement reads, noting that global producer price and food price inflation continued to surprise higher in recent months and could do so again.
“Oil prices have increased sharply, with current prices well above our forecasted levels for this year. Electricity prices are higher throughout the forecast and with other administered prices continue to present short- and medium-term risks.
“Given the moderate medium- and long-term inflation projections set out above, a weaker currency, higher domestic import tariffs, and escalating wage demands present additional upside risks to the inflation forecast,” the MPC added.
Meanwhile, South Africa’s economic growth has been revised slightly downwards off the back of “the larger negative effect on output than was previously estimated from the July unrest and other factors”. The MPC has now forecast the economy will grow by 5.2% this year, down from a previous forecast of 5.3%.
In its prognosis of South Africa’s economic outlook, the MPC said July’s unrest, the pandemic and ongoing energy supply constraints “are likely to have lasting effects on investor confidence and job creation, impeding recovery in labour-intensive sectors hardest hit by the lockdowns”.
Moreover, high export prices are expected to fade, “perhaps faster than previously expected”. According to the MPC statement, whereas a current account surplus of 0.7% of GDP was forecast for 2022, the committee now expects a current account deficit of 0.6% of GDP.
In 2020, the bank cut the repo rate by 300 basis points to aid the country’s ailing economy, as it reeled from the pandemic’s onslaught. Low interest rates support the economy by stimulating spending and investment.
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