Lighter touch suggests rates are near peak

The Reserve Bank increased borrowing costs at a slower pace on Thursday, suggesting SA interest rates are getting close to a peak and the Bank is confident consumer inflation will go back to the mid-point of the target range in the short term.

On the last day of its threeday meeting, the Bank’s monetary policy committee (MPC) lifted the repo rate by 25 basis points (bps) to 7.25%. That was in line with eight economists surveyed by Reuters, while 11 expected a 50 bps hike.

The stance signals the Bank is now more aware of the downside risks to domestic growth, even as inflation expectations increased over the past year.

Defending what is perceived to be a less aggressive stance even as inflation sits at 7.2%, well above the 3%-6% target range, Reserve Bank governor Lesetja Kganyago told journalists he does not think the economy has felt the full impact of the cumulative 350 bps hikes the MPC has enacted since the start of the rate-hiking cycle in November.

“The point of the matter here is monetary policy works with a lag [of 12-18 months].

“We have decided that given where we are with the economy, and where we are with the inflation rate and that we will be back within the target in the second quarter of this year

means it might be time we slowed the pace of the increase,” Kganyago said.

He added: “That’s where we started in 2021; we started with 25 bps and the question was, ‘what are you doing, you are taking a knife to a gun fight’. Then we moved to 75 bps and you said ‘this is an overkill. You guys are going to kill this economy’. Now we have said ‘okay, let us slow down’”.

The cumulative effect of previous borrowing cost increases is starting to coincide with a much lower growth performance in 2023.

The MPC said the economy would grow by 2.5% in 2022, compared with its previous prediction of 1.8% in November. No growth is expected for the fourth quarter of 2022, largely due to record load-shedding.

The economy is forecast to expand 0.3% for 2023, down from the November forecast of 1.1% and September’s 1.4%.

Kganyago said that given the scale of load-shedding – which the country has experienced every day since the start of 2023

– the Bank estimates that power outages will deduct as much as 2 percentage points from growth in 2023, compared with the previous estimate of 0.6 percentage points.

“Economic growth has been volatile for some time, prospects for growth appear even more uncertain than normal.

“A material reduction in loadshedding would significantly raise growth.”

The rate decision was not unanimous, with three members of the MPC preferring the announced increase and two members preferring an increase of 50 bps.

Announcing the decision, the MPC said its policy aims to anchor inflation expectations more firmly around the midpoint of the target band.

Kganyago warned that risks to the inflation outlook are assessed to the upside.

He said that locally, electricity price inflation had climbed significantly higher in 2023 so far and would continue to do so for the rest of the year and in 2024. He added that other administered prices continued to present clear medium-term risks.

Inflation expectations, mostly driven by businesses and labour unions, also increased strongly over the past year. Average expectations of future inflation surveyed in the fourth quarter of 2022 increased to 6.1% for 2023 and 5.6% for 2024.

For 2023, headline inflation is unchanged at 5.4% but slightly higher for 2024 at 4.8% from 4.5% in November. In 2025, expectations for headline inflation remain unchanged at 4.5%.

SALARIES

The Bank’s forecast for core inflation was also slightly lower at 5.2% in 2023, from 5.5% in November. For 2024, core inflation is expected to be at 4.7% from 4.8% previously.

“Considerable risk still attaches to the forecast for average salaries,” Kganyago said.

The implied policy rate path of the central bank’s quarterly projection model, which the MPC uses as a guide rather than a forecast, now indicates its key rate will average 6.54% by the end of the 2022 period — higher than November’s 6.3%.

The projections are higher for 2023 at 7.08% from November’s 6.55% and September’s 6.36%.

Citadel Global director Bianca Botes told Business Day that Thursday’s rate decision was a nuanced one.

“The Reserve Bank not only needed to consider inflation and growth but [also] price stability and the rand”.

Botes said the Bank tried not to deviate “too far” from the US Federal Reserve’s policy stance and interest rate decision to ensure it did not trigger speculative selling of the rand.

“So we were expecting anything between 25 bps and 50 bps, with markets pricing in 50 bps,” Botes said.

Absa chief economist Peter Worthington said developments include a broadly stable exchange rate, some evidence of moderation in global inflation, softer energy and grain prices, and lower-than-expected inflation releases.