Sanisha Packirisamy, Economist at Momentum Investments
The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) kept interest rates on hold for the fourth consecutive interest rate-setting meeting at 8.25%. Interest rates have climbed by a cumulative 475 basis points since November 2021.
“Relative to the Reuters’ expectation, all 20 out of the 20 surveyed analysts expected no change in interest rates,” says Sanisha Packirisamy, economist at Momentum Investments. “The SARB kept its forecasts on headline and core inflation unchanged for this year and marked them slightly lower for next year. Even though the SARB’s baseline forecast is for global and local inflation to gradually moderate further, the SARB retained a cautious tone, flagging serious upside risks to the inflation outlook and a high level of uncertainty clouding the economic outlook”.
In the question-and-answer session, the governor stated that a sustained deceleration in the inflation trajectory to the midpoint of the 3% to 6% target was not yet obvious. As such, any easing in policy was not strongly considered with the five-member committee unanimously agreeing to an unchanged stance on interest rates. “Still-elevated inflation expectations are likely to sustain a more cautious approach to easing policy. The outcome of the Bureau of Economic Research’s Inflation Expectation Survey for December 2023 worryingly showed that average inflation expectations were projected at 5.7% for 2024, significantly above the midpoint of the 3% to 6% target band,” according to Packirisamy.
“The main risks to the inflation outlook remain local energy and logistic bottlenecks which add to the cost of business operations, volatility in global food and oil prices due to geopolitical strife and the potential feed through effect into potentially higher wage growth in SA”.
She highlighted that “the SARB continued to advocate for other economic players to exercise their role in guiding inflation expectations down towards the midpoint of the target band on a more sustainable basis. The SARB noted the importance of maintaining a sustainable fiscal path and working towards alleviating the structural bottlenecks in the economy that are holding back economic growth and ultimately weakening the transmission mechanism of monetary policy decisions into the real economy.”
The SARB is likely to maintain its hawkish rhetoric to keep inflation expectations at bay. It has warned in the past that guiding inflation back towards the midpoint of the target on a more sustainable basis can help to reduce the economic costs of high inflation and can ultimately assist in achieving lower interest rates in the future as the central bank avoids having to hike more aggressively to contain inflation pressures, which could have unhinged.
“Central banks remain nervous to declare a victory over inflation too soon given that many unresolved episodes of inflation in the past were proven by the International Monetary Fund to have been accompanied by ‘premature celebrations’, as central banks relaxed policy too soon and second-round inflation shocks surprised markets. Moreover, looser fiscal policy in SA has placed a disproportionate burden on monetary policymakers to contain inflation expectations and keep inflation under control,” added Packirisamy.
“As such, we expect the SARB to remain on hold at 8.25%, with the first interest rate cut of 25 basis points projected for the second quarter of 2024, at the earliest. We have pencilled in three interest rate cuts of 25 basis points each for 2024, which is in line with the suggested extent of easing highlighted by SARB’s Quarterly Projection model for the same period.”
ENDS
