The South African Reserve Bank (Sarb) has remained concerned about the expectations to consumer inflation outlook as the balance of risks has been assessed to the upside though the forecast has improved.
The Sarb’s Monetary Policy Committee (MPC) yesterday left the repurchase rate (repo rate) unchanged at 8.25%, and the prime rate at 11.75%, as headline inflation print for May was 5.2%, unchanged from April and still in the top half of the bank’s 3%-6% target range.
The bank has now projected headline consumer price inflation for this year at 4.9% compared to 5.1% in May, dipping below the 4.5% midpoint over the next few quarters mainly because of fuel and food prices.
However, Sarb Governor Lesetja Kganyago said the latest survey results showed average inflation expectations at 5% next year and 4.9% two years ahead, still uncomfortably above the Sarb’s 4.5% objective, and above the bank’s inflation forecasts.
Kganyago said four members of the MPC preferred an unchanged stance, and two preferred a reduction of 25 basis points.
The interest rate has increased by 475 basis points since November, 2021 and has been kept unchanged since the last increase in May, 2023.
Kganyago said in discussing the stance, MPC members agreed that restrictive policy remains appropriate to stabilise inflation at 4.5% given the inflation risks.
The governor said some members, however, were of the view that the inflation outlook had improved enough to reduce the degree of restrictiveness.
“Global interest rates remain high, especially in the United States, and rates may stay higher for even longer than markets currently anticipate. This presents risks to the currency outlook,” Kganyago said.
“Domestically, inflation expectations do not yet reflect the 4.5% midpoint objective over the medium term. While expectations are moving in the right direction, they continue to show the impact of the recent inflation surge,” he said.
Dr Elna Moolman, Standard Bank Group head of South Africa macroeconomic research, said the 25 basis points cut preferred by two MPC members was consistent with their expectations as they see the current inflation forecasts and dynamics as consistent with some monetary easing.
“Forecast inflation should reach the inflation target midpoint not only quite soon, but also on a persistent basis which in our view gives a forward-looking central bank room to ease monetary policy from the current restrictive stance,” Moolman said.
“The Reserve Bank regards the inflation risks as biased to the upside, while we see it as more balanced similar to the Reserve Bank’s assessment at the previous MPC meeting,” she said.
However, Kganyago said the Sarb remained concerned about administered prices.
“We have had to mark up electricity inflation for this forecast round, even as other categories shifted lower. Services price inflation also remains uncomfortably above the midpoint,” Kganyago said.
“We are committed to stabilising inflation at the midpoint of the target band. Achieving this outcome will improve the economic outlook and reduce borrowing costs,” he said.
Inflation has already fallen back to the Sarb’s target band of between 3% and 6% but is taking longer to reach the target of 4.5%.
Everest Wealth, a private investment and wealth management firm, yesterday said it was now time to start cutting interest rates in a bid to stimulate economic growth and offer some much-needed relief to consumers.
Riaan Grobler, head of advisory services at Everest Wealth, said consumers have suffered heavily for the past two years due to high food, fuel, and power prices while the high interest rate has made their debt much more expensive.
Grobler said several central banks have already announced interest rate cuts and it is expected that the US Federal Reserve will do the same in September, and probably again in November and December.
“There are now sufficient reasons to start cutting the interest rate and this chance should not be wasted when the next interest rate announcements come in September, and November. The formation of the Government of National Unity has led to less political uncertainty and an increase in confidence which has also strengthened the rand,” he said.
“The Reserve Bank’s Monetary Policy Committee therefore has the opportunity to cut the interest rate in September and again in November, which could further support consumer spending and households’ ability to service their debt in time for the festive season,” Grobler added.
Meanwhile, the Sarb has trimmed its second quarter economic growth estimate modestly to 0.6% following last week’s disappointing mining and manufacturing numbers.
However, it is expecting somewhat faster growth over the medium term, supported by a more reliable electricity supply and improving logistics, among other factors.
BUSINESS REPORT