Bank holds rates while it waits for inflation certainty
The Reserve Bank left rates unchanged for a fourth consecutive decision but maintained its hawkish rhetoric, with governor Lesetja Kganyago stating it requires more evidence that inflation will anchor at the 4.5% target “sustainably”, suggesting borrowing costs will be higher for longer.
The decision to keep the repo rate at 8.25% on Thursday was in line with forecasts in a Reuters poll of economists. The decision by the monetary policy committee (MPC) was unanimous.
Pushing back on questions about when the Bank will start cutting rates, Kganyago said inflation is not trending towards the preferred 4.5% midpoint of the 3%-6% target range.
“The committee watched closely when inflation came close to the midpoint target in July and August 2023, at 4.7% and 4.8% [respectively], but was disappointed when it shot up again, averaging 6% in 2023 instead of the 5.9% forecast by the Bank,” Kganyago said at a media briefing.
“Before there are signs that inflation is sustained there, the MPC will not recalibrate policy.”
He added the Bank’s decisions are not time-dependent but state-dependent.
“We will be watching key variables such as the inflation outlook, the growth outlook. The risks attached to the outlook will determine recalibration of monetary policy.”
He said the December Bureau for Economic Research inflation expectations survey shows expectations increased to 5.7% for 2024.
“Achieving permanently lower inflation and interest rates requires inflation expectations to be closely anchored to the midpoint of the target band,” he said.
The Bank kept its headline inflation forecast at 5% for 2024, 4.6% for 2025 and 4.5% in 2026 (both were previously at 4.5%).
Core inflation, which excludes volatile food and energy prices, is expected to be 4.6% in 2024 after a reading of 4.9% in 2023. Forecasts for 2025 and 2026 were little changed at 4.6% and 4.5%.
Kganyago said risks to the inflation outlook persist. Global risks included geopolitical tension, which will keep global oil
markets tight. Domestic risks to inflation include the recent increases in egg and potato prices, which are a reminder that food inflation remains unpredictable and high. He added that electricity prices and logistics constraints continue to be clear inflation risks.
The Bank revised its SA economy outlook downwards to 0.6% in 2023, compared with its previous forecast of 0.8% in November. It left GDP growth forecasts for 2024 and 2025 unchanged from November’s 1.2% and 1.3%.
Before Kganyago’s speech on Thursday, the rand was 0.3% weaker at R18.9376/$. Within a few moments of the announcement, it had recovered a little to be flat at R18.8992.
The implied policy rate path of the central bank’s quarterly projection model, which the MPC uses as a guide rather than a forecast, suggests the repo rate will modestly decelerate. It sees the rate at 7.54% in 2024, 7.29% for 2025 and 7.3% for 2026.
The repo rate, unchanged for a fourth straight meeting, needs to be viewed in a global rates context. The US Federal Reserve (Fed) kept its key interest rate at 5.25%-5.5% for the third time in a row, citing a steady economy and easing inflation.
Policymakers are projecting the Fed to cut rates at least three times in 2024. The dot plots showed a potential total of seven rate cuts by 2026, with the rate reaching a range of 2%-2.25%.
The accompanying Fed statement acknowledged the easing of inflation over the past year, with projections for core inflation to come down to 2.2% by 2025 and a return to the 2% target by 2026.
Oxford Economics senior economist Jee-A van der Linde said expeditious policy tightening by the Fed has seen the real interest rate differential between SA and the US narrow.
“SA’s elevated risk premium limits the extent to which the rand benefits from the positive interest rate differentials with advanced economies,” he said.
Momentum Investment economist Sanisha Packirisamy said central banks are still reluctant to declare victory over inflation given that many unresolved episodes of inflation in the past were proved by the IMF to have been accompanied by “premature celebrations”.
She said Momentum expects three interest rate cuts of 25 basis points (bps) for each 2024 meeting, “which is in line with the suggested extent of easing highlighted by the Bank’s quarterly projection model for the same period”.
FNB chief economist Mamello Matikinca-Ngwenya said Thursday’s decision provides further conviction that the hiking cycle is behind us.
She warned that the MPC may be cautious as some risks — including the upcoming elections as well as any worsening in risk sentiment and exchange rate pressure — remain high.
North-West University economics professor Raymond Parsons said the modest growth outlook again emphasises the extent to which growth-orientated policies and projects, such as resolving the transport and energy bottlenecks, still need to be urgently implemented to achieve higher, jobrich growth rates.
Old Mutual Group chief economist Johann Els is more optimistic. He said the recent and expected trends, including less hawkish guidance from the Fed, lower international oil prices, less load-shedding and possible downside surprises in core inflation, could mean conditions by March are more in line with rate cuts.
“I expect rate cuts to start from March and will likely total 100bps-125bps this year and another 50 bps in 2025.”