/ 24 November 2022

Another 75 basis point hike as Reserve Bank seeks to tame ‘inflation monster’

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Reserve Bank governor Lesetja Kganyago

The South African Reserve Bank’s monetary policy committee (MPC) has lifted the repo rate by another 75 basis points, marking the sixth consecutive hike in a year.

Two of the five committee members preferred a lower 50 basis point hike. The repo rate, which affects the cost of borrowing, now stands at 7%, higher than its level before the Covid-19 pandemic.

Speaking after the announcement on Thursday, Reserve Bank governor Lesetja Kganyago said he still believed that the policy stance remained accommodative, supporting credit growth while also tackling elevated inflation.

“South Africans are complaining about the rising cost of living. And it is important that the central bank continues to deploy its instruments to tame the monster of inflation,” Kganyago said.

The Reserve bank now expects headline inflation to average 6.7% in 2022, up from the previous forecast of 6.5%, according to the MPC statement. The bank also expects higher inflation next year, forecasting 5.4% (up from 5.3%).

“Risks to the inflation outlook are assessed to the upside,” the statement reads.

“Despite easing of global producer price and food inflation, Russia’s war in the Ukraine continues, with adverse effects on global prices generally.”

It said the oil market is expected to remain tight and administered prices continue to present clear medium-term risks. 

On Wednesday, Statistics South Africa released its October consumer price index print, which showed that the inflation rate inched up to 7.6% from 7.5% in September.

The October number bucked analyst expectations, which forecast that inflation would continue on the downward trend seen the two months prior. The Reserve Bank was expecting inflation to retreat to 7.3% in October.

Analysts believe that inflation — which climbed for 12 months amid pandemic and Russia-related supply chain shocks — peaked in July.

But inflation has proven to be sticky. 

Asked whether inflation will persist, Kganyago said: “I can’t say definitely that it is persistent. What we can say is that it is temporary.”

The Reserve Bank expects inflation to remain above the upper limit of its 3% to 6% target range until the second quarter of 2023. It is expected to revert to the 4.5% midpoint of that range by the second quarter of 2024.

Core inflation, which excludes changes in food and energy prices, rose to 5% year-on-year in October from 4.7% in September.

Although the bank’s core inflation forecast for 2022 is unchanged, staying at 4.3%, it is now expected to rise higher than previously expected in 2023 — to 5.5%, from 5.4%. 

According to the October inflation print, regulated administered prices, including municipal taxes, rates and levies, rose 15.2% compared to a year ago. Regulated administered prices represent the highest of all headline inflationary price increases.

Kganyago noted that high administered prices indicate that inflation can no longer be blamed on imported shocks.

In a sign of easing oil price pressures, the MPC now forecasts that fuel price inflation in 2022 will be 33.3%, down slightly from 33.5% at the previous meeting. 

But food price inflation has been revised up to 8.8% in 2022, from 8.1% previously. Higher food price inflation is largely the result of the rand’s weaker exchange rate.

A large consideration for the MPC has been the US dollar’s recent strength, and the rand’s consequent weakness, which was flagged in the Reserve Bank’s monetary policy review last month.

The rand has depreciated by about 7% this year.The MPC’s implied starting point for the rand forecast is at R17.76 to the dollar for the fourth quarter of 2022, compared with  R16.91 in the third quarter.

Initially dollar strength came mostly at the expense of other advanced economy currencies rather than those of emerging markets, the review noted. But emerging market currencies have also depreciated against the dollar in recent months as a result of further increases in US rates and lower commodity prices.

The dollar’s firmness has, however, recently eased amid expectations of an impending pivot by the US Federal Reserve.

November’s Federal Open Market Committee meeting minutes, released last night, indicated greater support for a slowing in the pace of interest rate hikes. The dovish tilt caused the dollar to slide and the rand appreciated to about R17 to the dollar — marking its greatest strength since the end of August.

The minutes noted that monetary policy stateside is approaching a sufficiently restrictive stance and a substantial majority of participants judged that slowing the pace of increases would soon be appropriate. 

To date the Fed has risen by 375 basis points. The South African Reserve Bank has hiked by 275 basis points since last November. More hikes by the Fed would widen the differential between the US and South Africa, which could hurt the rand.

Another repo rate hike threatens to throw cold water on the country’s already glacial economic growth and will undoubtedly inspire ire from civil society and labour. 

The Reserve Bank now expects the economy to grow by 1.8% in 2022, down slightly from its previous forecast (1.9%). 

The bank’s GDP growth forecast for the second quarter is unchanged at 0.4%, but fourth quarter growth will be a meagre 0.1% (down from 0.3%). Low fourth quarter growth is largely the result of load-shedding.

“Over the medium term, and despite stronger private investment, the forecast takes into account  lower commodity prices, higher inflation and interest rates,” the MPC statement said, adding that load-shedding could shave 0.6 percentage points from GDP in 2023.

The economy is forecast to expand by 1.1% in 2023 and by 1.4% in 2024, below the previous projections of 1.4% and 1.7% respectively. The Reserve Bank’s growth expectations are less bullish than what was forecast in the medium-term budget policy statement, delivered just last month.

Kganyago noted that inflation will undermine growth. Although there is a risk of over-tightening, that risk does not currently exist.