Is it premature for a pivot by the Reserve Bank?

The SA Reserve Bank’s monetary policy committee (MPC) starts its final meeting of 2022 today and for the first time in almost three years governor Lesetja Kganyago will announce the rates decision at a physical media conference on Thursday afternoon.

The Bank has relocated temporarily to offices in Centurion while it renovates the big black building in Pretoria, which should add interest to the proceedings. But the decision will be watched with great interest in any event, especially given the shifts in the global backdrop since the MPC met in September.

The market consensus is still for another 75 basis point (bps) hike, but the committee will surely consider going 50 bps instead. Last time, two members favoured 100 bps hikes, but 75 prevailed. The debate behind closed doors could be just as heated this time.

SA’s inflation rate may have peaked in July, at 7.8%. But it is a question of how the central bank sees the trajectory now and when it expects inflation to get back within target — keeping in mind that in the era of Kganyago the Bank’s effective inflation target is the 4.5% midpoint of the range and not the 6% upper end.

The governor has made it clear the Bank is not letting up against inflation, saying in a recent speech that “we have learnt from experience that we must not be tempted to loosen our grip on inflation, or to fall behind our peers as rates are normalised — the consequences would be too costly”.

A key issue is the timing of the so-called pivot by the US Federal Reserve — whether it will happen in December, as expected — and, if it does, what the impact will be for global financial markets in general and emerging markets in particular. The US’s lower-than-expected inflation for October fuelled optimism that inflationary pressures might be subsiding, the peak might have passed and the Federal Reserve might be preparing to gear down from the 75 bps hikes of the past several months to 50 bps.

The dollar has come speedily off the 20-year highs it had been hitting, declining by about 4% even though it is still about 11% up this year. A weaker dollar has taken the pressure off emerging market currencies including the rand, which has been trading in the R17 range where previously it was over R18.

If the rand continues to strengthen, it will help to put a lid on inflation. It will amplify the benefits of lower global commodity prices, particularly oil, which has been sliding on expectations that a global recession could be looming — with China’s growth particularly at risk.

More generally, a Fed pivot and somewhat weaker dollar would make for more benign global financial conditions, which means less risk of capital outflows and currency weakness for emerging markets such as SA.

However, the Fed’s next meeting is only in December, and even then the level of uncertainty about global prospects will remain high. The Reserve Bank’s MPC will have that in mind this week. But it will also be mulling domestic inflationary pressures and whether it can trust yet that inflation and inflation expectations are past their peak.

At its past meeting the committee forecast average inflation for this year at 6.5%, with the inflation rate coming back to the midpoint only in 2024. In real terms interest rates are still slightly negative, which means that monetary policy is still “accommodative”, as the policymakers say, and not yet quite tough enough to get inflation down to where the Bank wants it to be.

Global inflationary pressures might be subsiding, but domestic inflationary pressures are clearly still in play, with wage settlements in particular coming in above 6% and expectations running close to or above 6%.

The Bank will no doubt remind us that it is the poor who suffer worst when the cost of living is soaring. It will no doubt also remind us that decisive action now could save us from harsher action later. But 50 bps might still be harsh enough to keep SA’s inflation rate trending downwards, in an economy which is less than robust. Perhaps the Bank might risk a pivot.

GOVERNOR HAS MADE IT CLEAR THE BANK IS NOT LETTING UP AGAINST INFLATION