Tight monetary policy is to protect consumers from extremely high cost of living – SARB

SARB Governor Lesetja Kganyago yesterday said that the persistence of inflation had undermined the long-run effectiveness of policy. File picture: Oupa Mokoena/ African News Agency (ANA)

SARB Governor Lesetja Kganyago yesterday said that the persistence of inflation had undermined the long-run effectiveness of policy. File picture: Oupa Mokoena/ African News Agency (ANA)

Published Jun 28, 2023

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The South African Reserve Bank (SARB) has justified its decision of implementing a restrictive monetary policy on trying to protect consumers against extremely high cost of living in the near future.

The SARB yesterday published its 2022/23 Annual Report for the year ended March 31, 2023, offering a transparent account of the bank’s strategy, performance, and impact on society, focusing on both financial and non-financial information.

The SARB’s Monetary Policy Committee (MPC) has raised its benchmark repo rate from a historic low of 3.5% in November 2021 to the current historic 14-year high of 8.25% in its May meeting.

The MPC has been on an aggressive hiking cycle to fight off rising inflation, which breached the upper limit of the target range in May 2022 and peaked in July, reaching a high of 7.8%.

Though the consumer price index (CPI) inflation moderated somewhat to 6.9% by January 2023, it surprised to the upside again in February and has remained sticky at 6.3% in May.

Headline inflation is expected to average 6.2% in 2023, with a more pronounced moderation only expected in the latter years with an annual average of 5.1% in 2024 and 4.5% in 2025.

SARB Governor Lesetja Kganyago yesterday said that the persistence of inflation had undermined the long-run effectiveness of policy.

Kganyago said monetary policy operated with a long lag of approximately 12 to 24 months, with peak impacts of rate hikes between three and five quarters ahead.

He said this meant that monetary policy decisions must be forward looking and seek to prevent second-round effects and the risk that inflation expectations de-anchor following inflation shocks

“The monetary policy actions taken are expected to moderate expectations of future inflation through the commitment to returning inflation to the target over the medium term,” Kganyago said.

“Failure to decisively deal with inflation early carries the prospect of much more difficult challenges to the economy down the line.”

Meanwhile, the SARB noted that a series of headwinds to economic growth had intensified as the year progressed.

Kganyago said primary among these headwinds was the major intensification of load shedding in the fourth quarter, which, in addition to preventing a better growth outcome for the year, further heralded a weak start to 2023.

In January, the SARB’s forecast for gross domestic product (GDP) growth for this year was revised down sharply to 0.2%, with 0.7% projected for 2024.

But these forecasts have since been revised up, to 0.3% and 1.0% by the time of the May meeting though they continued to reflect an economy struggling to find its feet.

Kganyago said weaker global demand, falling export prices and near-term local logistical constraints suggested further moderation in export growth.

As a result, Kganyago said domestic economic conditions remained fragile and growth low. Kganyago said the capacity of the economy to add significantly to its potential growth remained similarly subdued until clear additions to electricity supply were evident.

He said the shortage of energy is both raising prices and impeding economic growth, a deepening of South Africa’s own stagflation problem.

“More load shedding, logistics blockages and lower productivity and income growth pose the biggest downside risks to our outlook for near- and medium-term growth,” he said.

“The insufficiency of energy supply continues to impact on the whole economy, from economic activity levels to financial risk, and both the public and private sectors.”

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