Patrick Buthelezi, Economist at Sanlam Investments
The monetary policy committee (MPC) at the South African Reserve Bank (SARB) continued its aggressive tightening approach by raising the policy rate by an additional 50 basis points, bringing the repo rate to 8.25%. This decision was unanimously supported by all committee members. The SARB has consistently increased the policy rate over the past ten monetary policy meetings, resulting in a cumulative hike of 475 basis points since November 2011. This current policy rate represents the highest level observed since 2009, as the Bank remains committed to combating the persistently high cost of living. At least, the SARB acknowledged that the monetary policy stance has become restrictive, which suggests we are probably very close or at the top of the interest rate hiking cycle. The repo rate exceeds the Quarterly Projection Model steady state policy rate of 7.0%. Additionally, the monetary policy works with long lags.
The SARB, nonetheless, revised its inflation forecast upwards to 6.2% in 2023 and 5.1% in 2024, while maintaining a projection of 4.5% for 2025. The upward revision reflects high food prices and a weak currency. The weak exchange rate and load-shedding have prevented the pass-through of lower global food inflation to domestic food inflation. Additionally, average wage growth and unit labour costs are expected to be higher in 2023 and 2024.
The SARB has made slight upward revisions, projecting 5.3% in 2023, 5.0% in 2024, and 4.6% in 2025. This aligns with the observation of persistent global core inflation. This is consistent with observed sticky global core inflation. The SARB anticipates headline inflation to return within the target range in 3Q2023. However, the sustainable reversion to the midpoint of the target range is expected only by the second quarter of 2025. There is uncertainty regarding how fast inflation will return to the target band.
Hence, the Bank assesses the risk to the inflation outlook to be titled on the upside owing to the weak exchange rate, the adverse impact of load-shedding on supply and cost of doing business, high administered prices, and international oil prices. The recent depreciation of the currency is expected to contribute to inflationary pressures. Given that South Africa is a small open economy, the exchange rate plays a critical role. The Bank’s response aims to prevent potential secondary effects and tries to re-anchor inflation expectations towards the midpoint of the target range.
The MPC has made a marginal upward revision to its near-term GDP growth forecast, now projecting 0.3% growth in 2023, aligning with global trends. However, the forecasts for GDP growth in 2024 and 2025 remain unchanged at 1.0% and 1.1%, respectively. The risk to the economic outlook is assessed to be balanced.
It is likely that the MPC will maintain a restrictive monetary policy stance for longer and evaluate the impact of the cumulative interest rate hikes. However, the possibility of future interest rate hikes is not entirely ruled out and will depend on the inflation outlook. The currency will continue to be of critical importance. The SARB aims to be convinced that inflation and inflation expectations are firmly anchored towards the midpoint of the target range.