‘Now it’s up to the government’
Reserve Bank says it has done all it can to fight inflation and reforms must be implemented
An acceleration in inflation gives the central bank little room to cut rates, leaving reforms as the best bet to grow the economy and fight inflation, says Reserve Bank governor Lesetja Kganyago.
“Higher growth and permanently lower inflation could be achieved sooner by implementing energy and logistics sector reforms, achieving public debt sustainability and aligning administered prices with the inflation target,” Kganyago said in the central bank’s annual monetary policy review released this week.
He issued his admonition against a background of the worst load-shedding on record and the collapse of the rail logistics system managed by Transnet.
“Logistical challenges continue to strain the country’s export performance, especially for mining, and potentially raise the cost of imports, adding to domestic inflation and reducing export competitiveness for manufactured goods. Increased investment, more competition, and improved security for the sector can enhance efficiencies and raise productivity,” the review said.
Global issues were also at play, with core inflation persisting and increased geopolitical transitions set to prolong an increase in neutral real interest rates.
Inflation data released this week by Stats SA show that CPI rose from 4.7% year on year in August to 5.4% in September. This puts the Bank’s CPI projections at 5.1% for the third quarter of 2023 and 5.4% for the fourth quarter towards the top of its inflation target band of between 3% and 6%.
‘Hawkish pause’
Professor Raymond Parsons of North-West University Business School said if the inflation outlook remains high until the next meeting of the monetary policy committee (MPC) in November, it may warrant another “hawkish pause”.
“As the monetary policy review has for now taken monetary policy as far as possible into restrictive territory, it is more urgent than ever to implement growthfriendly policies and projects. All eyes will be on the medium-term budget to produce sustainable fiscal outcomes,” said Parsons.
Finance minister Enoch Godongwana tables the medium-term budget policy statement (MTBPS) on November 1.
Parsons said the emergence of an even higher fiscal deficit than previously expected and a shortfall on the current account of the balance of payments need to be addressed in the MTBPS to reduce uncertainty, boost confidence and promote growth.
Momentum Investment economists Herman van Papendorp, Sanisha Packirisamy and Tshiamo Masike said in a note that headline CPI surged on higher fuel prices.
“Renewed upward pressure from fuel prices over the past two months comes after 22 consecutive months of deceleration of transportation inflation, which largely drove down CPI.”
They said that due to mounting fiscal pressures they expected the finance minister to report a wider deficit in the MTBPS, which will be tabled ahead of next month’s MPC meeting.
“A more fragile fiscal environment places upward pressure on the country’s risk premium, which is a concern for the Reserve Bank,” the Momentum economists said. “Consequently, we expect monetary policy to remain restrictive ... and we maintain our stance of rates being kept high for longer with the first cut in the second quarter of 2024 at the earliest.”
Households under pressure
The Bank’s review said: “Capital flows to emerging economies, especially those running current account deficits and expansionary policies, are at risk, potentially leading to unusually weak and volatile currencies.”
It said that due to high inflation households continued to be under pressure; real total compensation declined 1.8% year on year in the first half of 2023 despite job gains. “Similarly, real disposable income declined slightly in both the first and second quarters of this year. Nevertheless, household consumption expenditure, spurred by credit demand and savings drawdowns, expanded by 0.9%.
“On a quarter-on- quarter basis, household consumption declined in the second quarter, with contractions in all spending categories except for services. The decline was led by lower spending on food, beverages and tobacco, followed by fuel and power, reflecting the pressure on households from elevated food and energy prices,” the review said.
The Bank said that while headline inflation eased back below the 6% upper limit in June, dropping to just above the target midpoint in August, core inflation remained high relative to the pre-pandemic trend, and risks to both headline and core inflation were elevated.
PSG Wealth investment officer Adriaan Pask said the acceleration of the inflation rate in September supports indications that the Bank will keep rates steady at its November MPC meeting with a “hawkish” outlook.
Investment growth
Jacques Nel, head of macroeconomics at Oxford Economics, said: “The Reserve Bank is not expected to cut rates any time soon as inflation moves further away from the midpoint of the bank’s target range. We forecast inflation to average 5.9% in 2023 and 5.5% in 2024 and for the [Bank] to hold rates steady for the remainder of the year.”
The Bank’s review said investment growth over the medium term would be supported by both the private and public sectors, with private sector investment expected to come through renewable energy activities and the public sector input through projects registered with Operation Vulindlela.
“These projects are at various stages of development, implying a sustained flow of investment spending over the coming years. With respect to the public sector, the 2023 budget allocated R903bn for infrastructure investment, with more than 70% of this amount earmarked for transport and logistics, energy as well as water and sanitation.
“The historical trend of the public sector underspending on capital budgets remains a key downside risk while rising debt service costs could reduce resources available for government infrastructure projects,” the review said.
Higher growth and ... lower inflation could be achieved sooner by ... energy and logistics sector reforms Lesetja Kganyago Reserve Bank governor