Kganyago warns of further inflation risk even as trend appears firmly in favour of interest rate cut

Lesetja Kganyago, Governor of the Reserve Bank. Photo: Reuters

Lesetja Kganyago, Governor of the Reserve Bank. Photo: Reuters

Published Jul 31, 2024

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Reserve Bank governor Lesetja Kganyago yesterday expressed concern about continuing risks to the inflation rate, but many economists believe the outlook is more positive and could lead to an interest rate cut at the September meeting of the Monetary Policy Committee (MPC).

In an address to the Bank’s annual general meeting yesterday, Kganyago said annual inflation averages that are trending lower hide ongoing volatility in the underlying components of inflation, demonstrating the risks and uncertainty marking the disinflation path.

He said that in line with the global trend, South Africa’s headline inflation decelerated since the pandemic, falling from 6.9% in 2022 to an average 6% in 2023.

However, he said that since September last year, headline inflation had been fluctuating between 5% and 6%, with frequent monthly setbacks coming from fuel, food and services prices.

In February, core inflation rose by 0.4 percentage points to 5%, propelled sharply higher by medical insurance inflation. As of June however, core inflation had moved back to 4.5%, and he said the SARB expected core inflation averaging 4.6% this year, from 4.8% last year.

He said while inflation expectations had eased in the first half of this year, they still remained well above the midpoint of the target band.

While headline inflation came out between 5% and 6% for much of the past year, the Bank’s forecast showed it easing to 4.9% this year, pulled lower mainly by softening food and fuel inflation, and resting only at the midpoint in 2025 and 2026.

Old Mutual group chief economist Johann Els said he was more positive about inflation continuing to ease, as underlying inflation in South Africa excluding fuel was only 4.6%, consumer goods inflation was 3.5%, much risk had been eliminated with the successful election, the food inflation outlook was more stable, fuel prices were lower, the rand was more stable and stronger, and there was no reason why the the US Fed needed to be seen to be cutting interest rates first.

Els said a failure by South Africa’s MPC to adopt a more forward looking approach in September, and begin to cut interest rates, could run the risk of the already very weak economy going into recession.

Investec chief economist Annabel Bishop said in a note the SARB had reiterated it would not lower the repo rate unless CPI inflation was 4.5% year-on-year, and was forecast to remain around that figure for the forecast period.

“Currently this is the case for the forecast period,” she said.

She said a September cut in the repo rate was now widely expected (by the market), but would not necessarily be followed by another rate cut in November, as much would depend on inflation outcomes, which were currently expected to be lower.

“Even with some quantitative and qualitative adjustments to risk perceptions over time, the MPC has felt it appropriate to maintain the repurchase (repo) rate at 8.25% – a level set in May of 2023, ” Kganyago said.

Commenting on the global economic environment, he said: “In short: we are entering an era of new economic challenges, even as the recent ones have yet to be overcome. There is little fiscal or monetary policy space available to deal with the risks that could emerge to financial stability, renewed inflation pressures or even the growing challenge of climate change.”

He said inflation remained a major policy concern for central banks globally, even as inflation was easing, and after global inflation declined from 8.7% in 2022 to 6.8% in 2023.

“It remains high relative to the 2–3% inflation targets that many countries are trying to achieve,” he said.

Restrictive monetary policy, the recovery in supply chains and other pandemic-related bottlenecks had helped inflation to recede from its 2022 highs.

“However, global disinflation has slowed recently, as is well illustrated by consumer price inflation in the US still sitting at 3% relative to their 2% target,” he said.

He said the slow pace of disinflation reflected a pattern of lower imported inflation but higher services inflation across most economies. In some, rising wages and sustained pent-up demand for services have been key factors. In emerging markets specifically, fiscal challenges and sustained currency depreciations had played more of a role.

“Deepening geo-economic fragmentation, higher temperatures and other supply-related risks raise concerns about the long-term prospects for inflation, and considerable effort is going into reassessments of neutral real rate levels,” he said.

Inflation remained stubbornly high, and public debt levels globally were at record levels. Technological development carried both risks to cybersecurity and the hope of large and sustained boosts to global productivity. Meanwhile, 22 July appeared to have been the hottest day on Earth in recent history.

“Policy commitment to reduce inflation back to targets has been strongly signalled around the globe, and central banks have generally been cautious in their approach to policy,” he said.

He said the domestic economy is expected to grow by 1.1% this year, rising to 1.7% by 2026, as both household spending and investment start to strengthen.

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