Global Courant
The South African Reserve Bank (SARB) says underlying inflation has risen sharply over the past year and is expected to continue in the coming months.
In its latest annual report for 2022/23, the central bank said expectations of future inflation had moved significantly higher over the past six months.
Since May, consumer price inflation has stood at 6.3%, still above the target range of 3% to 6%. This despite efforts by the SARB to curb inflation by raising interest rates.
The bank has raised rates in 10 consecutive meetings since November 2021, adding 475 basis points to the cycle. The Monetary Policy Council (MPC) has raised the repo rate from a historic low of 3.5% in November 2021 to the current 8.25%.
The bank said its most recent 50 basis point increase in May 2023 marked monetary policy only now entering restrictive territory.
“Despite nominal policy adjustments, repeated upward inflation surprises, as in much of the world, have led to less tightening than expected at the time of policy adjustment,” the SARB reported.
“Persistent inflation has undermined the long-term effectiveness of policy. Monetary policy operates on a long lag of about 12 to 24 months, with peak effects of rate hikes between three and five quarters in the future.
“This means that monetary policy decisions must be forward-looking and avoid second-round effects, as well as the risk of derailing inflationary expectations following inflationary shocks.”
The SARB said the measures taken are expected to moderate expectations of future inflation through a commitment to bring inflation back to target over the medium term.
Failing to tackle inflation decisively as quickly as possible will create more challenges for the economy later on, the bank noted.
The trajectory of domestic inflation is strongly linked to South Africa’s economic growth, which continues to be stifled by the usual suspects: an unstable energy supply and a failing national logistics company contributing to supply constraints.
However, the future of interest rates in South Africa is unclear, with local perspectives both arguing for a potential curtailment and others arguing that the cycle will continue.
Economic outlook
A series of mounting headwinds has slowed economic growth in South Africa, despite the economy growing at a modest 2% in 2022.
The SARB said the main issue from the various headwinds remains the intensification of tax cuts in the fourth quarter of last year, which not only prevented better economic growth outcomes for the year but also ushered in a weak start to 2023.
“At the SARB MPC meeting in January, the GDP growth forecast for this year was revised sharply downwards to 0.2%, with a forecast of 0.7% for 2024. These projections have since been revised upwards. revised, to 0.3% and 1.0% by the time of the May meeting, but continue to reflect an economy struggling to get on its feet,” the SARB said
“Increased discharges, logistics blockages and lower productivity and income growth pose the biggest downside risks to our near- and medium-term growth prospects,” the bank added.
Read: Dark turn for interest rates
