/ 23 September 2021

Despite inflation risks, the monetary policy committee keeps rates on hold

The Reserve Bank.
Economists widely expect the South African Reserve Bank’s monetary policy committee to once again hold the interest rate at 8.25% when it concludes its meeting on Thursday.

Despite risks of elevated inflation, the South African Reserve Bank’s monetary policy committee (MPC) has unanimously voted to keep interest rates unchanged.

Announcing the MPC’s decision on Thursday afternoon, Reserve Bank governor Lesetja Kganyago said the risks to the short-term inflation outlook have been assessed to the upside. 

“Rapid global producer price and food price inflation have surprised to the upside in recent months and could do so again,” the MPC statement reads.

“Oil prices have become more volatile in recent weeks and could rise beyond our expectations. Electricity and other administered prices also continue to present short-term risks. Given the medium and long-term projections set out above, a weaker currency, higher domestic import tariffs, and escalating wage demands present further longer-term upside risks to the inflation forecast.”

Consumer price inflation edged even higher above the Reserve Bank’s midpoint to 4.9% in August. Inflation was driven by elevated vehicle and fuel prices. The August inflation figure, reported by Statistics South Africa on Wednesday, marks the fourth consecutive month that the annual increase is higher than the midpoint.

Despite short-term inflation shocks, Kganyago assured that prices would remain contained in South Africa.

Average surveyed expectations of future inflation remain unchanged at 4.2% for 2021 and 4.4% for 2022, according to the MPC statement. Market-based expectations for inflation are slightly higher for 2021 at 4.4% (up from 4.3%) and stable over longer horizons.

Against the backdrop of contained inflation expectations, the MPC decided to keep the repo rate unchanged at 3.5% a year. The repo rate is the interest rate at which the central bank lends money to commercial banks, which then affects the rate at which they lend to their customers. 

The MPC expects inflation to stay below the midpoint despite elevated prices overseas and an indication that the US Federal Reserve is not far off from tapering monetary policy stimulus, which could create some negative financial market sentiment and cause a rise in risk aversion.

Last week, data released by the US Bureau of Labour Statistics showed that inflation remained close to a 13-year high and hovered at more than 5% for the third consecutive month. 

On Wednesday, Fed chair Jerome Powell said the US central bank could begin scaling back asset purchases in November and complete the process by mid-2022.

Kganyago said on Thursday: “When policy begins to normalise in the US and advanced economies, there will be a repricing of financial assets and a realignment of global exchange rates. And we are going to be watching that. And so for South Africa, as a small open economy, as the advanced economies central banks normalise policy …  Exchange rates might depreciate. 

“Our focus as a central bank would be to see whether those movements of those variables lead to second-round effects and thus a rise in inflation. And that is what we will be responding to.”

The MPC statement noted that, although policy settings in advanced economies remain accommodative, the spread of the Covid-19 Delta variant, higher global inflation and uncertainty about the normalisation path for interest rates continue to cause financial market turmoil and capital flow volatility. 

Risk aversion persists where economies fail to take advantage of improved global prospects or to reduce large macroeconomic imbalances, the statement said.
South Africa’s economy has been supported by robust trade on the back of currency-strengthening commodity prices. But the Covid-19 pandemic, rising inflation, weaker commodity export prices and July’s unrest pose a threat to future economic growth.