Bank puts a damper on growth hopes

One of the Reserve Bank’s five monetary policy committee members switched sides this time, veering to the doveish rather than the hawkish. At the last meeting in November, the three members who favoured a 75-basis point increase prevailed over the two who wanted 50. This time, the two who favoured 50 lost out to three who favoured a 25 basis point hike.

That does not mean the committee cannot do another 25 at its March meeting, depending on the data. But while the doves versus hawks debate is often a silly one dismissed by Bank governor Lesetja Kganyago who says the committee is not an aviary the twists and turns do reflect how finely balanced these decisions have become.

Some will accuse the committee of talking like a hawk but acting like a dove. But its updated forecasts on inflation and growth provide a clear rationale for its decision. Fuel prices are coming down fast and though electricity price inflation will be higher than expected and food price inflation is still high, it is slowing.

The upshot is that though the Bank has upped its inflation forecast for 2024 slightly, it has not changed its inflation forecast for this year, which is still at 5.4%. And importantly, it now sees the inflation rate coming back within the target range in the second quarter of this year.

We know that is not nearly good enough for the governor and the committee, who since 2017 have effectively targeted the 4.5% midpoint of the inflation target range not the 6% top of the range.

But the Bank still expects average inflation of 4.5% in 2025. And crucially, it has reduced its forecast for core inflation excluding volatile items such as food and fuel and that is an indication that inflation is not spiralling through the economy.

At the same time, the Bank’s new growth forecasts are bleak.

It now expects the economy to grow by just 0.3% this year, because of much worse load-shedding than previously expected as well as trouble at Transnet. That rises to just 0.7% in 2024 and 1% in 2025. This is a loud wake-up call to government to act urgently on SA’s electricity and logistics crises and address the resulting slide in confidence and investment and exports. It does mean, however, that there will be little or no demand pressure in the economy that might see inflation run amok.

The committee did sound loud warnings about upside risks to inflation, global and local. Load-shedding itself is one of the key local risks because of the extent to which its raises the cost of doing business, the committee pointed out.

It is also worried about the rise in inflation expectations. As long as price-setters in the economy believe inflation is going up, they will keep trying to raise their prices at above inflation rates. Which is why the Bank has to get everyone to believe it is serious about getting inflation back to that mid-point.

Kganyago said more than once that the Bank “means business” and would do precisely that, emphasising yet again how important it is for the Bank to combat inflation to protect the incomes of South Africans and indeed how it could not wait for what he called “the whites of inflation’s eyes” to do so, because by then incomes would already have been eroded.

Asked the obvious question about President Cyril Ramaphosa’s comments on possible changes to the Bank’s mandate, Kganyago bounced the question, telling the reporter to ask the president. It was up to the people of SA not the Bank to decide on the mandate, he said.

But he made the case for the existing price stability mandate with his usual eloquence, spelling out why high inflation was not a growth strategy, nor was it an employment strategy. At a time when the cost of living is a huge concern for most households, we hope his words will be heard and that the debate about the mandate will die a quiet death.

Meanwhile, the committee will have to wait and see whether it has done enough with 25 or has to do more next time.

IT NOW EXPECTS THE ECONOMY TO GROW BY JUST 0.3% THIS YEAR, 0.7% IN 2024 AND 1% IN 2025