This was the Monetary Policy Committee’s (MPC’s) third consecutive hold after nine consecutive hikes which raised rates by a cumulative 475 basis points. But the policymakers still see inflationary risks, so don’t expect a cut any time soon. Indeed, the South African Reserve Bank (Sarb) signalled that it would pull the hiking trigger again if inflation was not contained.  

“Serious upside risks to the inflation outlook remain. In light of these risks, the committee remains vigilant and stands ready to act should risks begin to materialise,” the MPC said. 

Still, it was telling that the decision among the five members of the MPC was unanimous. No one was voting for a hike now, and the statement noted that at current levels, “policy is restrictive, consistent with the inflation outlook and elevated inflation expectations”.

Talk like a hawk but don’t walk that talk seems to be the MPC’s current holding pattern. While the statement was being read, the rand gained against the dollar, rising to 18.77/dlr from 18.84. After the rate announcement was made, it surrendered those gains.

But this strategy is ultimately aimed at lowering inflation expectations. It is not a case of a dove wearing the feathers of a hawk.

On the inflation front, the MPC’s forecast for food inflation remains worrying, at an average of 10.6% for 2023 from 10.4% previously. In October, food inflation accelerated to 8.8% from 8.0% in September, driving the headline number higher to 5.9%. This is the upper borderline of the Sarb’s 3-6% target range.

But Governor Lesetja Kganyago pointedly noted that the Sarb does not react to monthly data. In July, the CPI hit its 2023 low of 4.7%, but the MPC didn’t cut rates then, a stance that it will regard as subsequently vindicated.  

“You cannot respond to monthly figures,” Kganyago said during the Q&A session which followed his reading of the statement. “The important thing is the trajectory of the forecast.”

For headline consumer inflation, or CPI, the MPC’s forecast for 2023 was revised down slightly to 5.8% from 5.9%.

“The headline inflation forecast for 2024 is 5.0% (down from 5.1%), before stabilising at 4.5% in 2025 and 2026,” the MPC said.

So inflation is seen as moderating slightly from previous projections, but there remain plenty of risks.

“Even as global headline inflation moderates, oil markets are tight and core inflation is sticky. Despite recent easing in some food price components, domestic food price inflation remains volatile, and increased in October… El Niño conditions present longer-term concerns,” the MPC said.  

“Imported goods inflation has increased over the year, and despite some better recent outcomes, remains sensitive to currency weakness. Electricity prices continue to present clear inflation risks, and with logistics constraints, are likely to have broader effects on the cost of doing business and the cost of living.”  

That highlights the inflationary risks from the snarl-up at the ports caused by Transnet’s meltdown.  

The Sarb has slightly raised its economic growth forecasts on expectations of a reduction in rolling blackouts. It now sees growth of 0.8% in 2023 from its previous forecast of 0.7%. This is not really moving the needle.

The bottom line is that rates are unlikely to come down any time soon, and could even go up before they come down, while the economy limps along. But inflation is a serious risk that erodes almost everyone’s incomes and the Sarb remains laser-focused on this issue.

Significantly lower rates right now would almost certainly mean much higher inflation and make the rand a punching bag for global markets. And this frail economy can only take so many blows. DM