Pre-MPC Analysis: a Hawkish pause expected

As the South African Reserve Bank (SARB) gears up for its upcoming Monetary Policy Committee (MPC) meeting, expectations are leaning towards no change in the Bank’s repo rate amid higher recent inflation prints.  However, a careful examination of the economic indicators and the factors influencing the SARB’s decision reveals a cautious optimism and the need for patience.

At the heart of the matter lies the intricate interplay between domestic economic conditions and global macroeconomic dynamics. Headline consumer price inflation has been trending lower from a peak of 7.8% in July 2022. Despite the recent relatively high print of 5.6% in February 2024, the downward trajectory in inflation is expected to resume over the next year towards the SARB’s effective target of 4.5%. A relatively favourable inflation outlook could prompt calls for immediate rate cuts, but prudence dictates a more nuanced approach.

We must acknowledge the significant influence of the US Federal Reserve’s (Fed) monetary policy decisions on emerging markets like South Africa. Historically, shifts in US interest rates have reverberated across global financial markets, affecting currencies and inflation expectations. Easing of US interest rates could provide a favourable backdrop for the SARB, facilitating a more accommodative monetary policy stance.

Furthermore, the reappointment of Lesetja Kganyago as Governor of the SARB signals continuity and stability in monetary policy, instilling confidence in investors and markets. This continuity is crucial as the SARB navigates its mandate to secure financial stability and pursue its inflation target amidst evolving economic conditions.

Key considerations

Core inflation, standing at 5%, remains above the midpoint of the target range, emphasising the importance of vigilance in monetary policy deliberations. Further, inflation expectations remain above the Bank’s target.

Crucially, the trajectory of inflation expectations serves as a barometer for the effectiveness of monetary policy interventions. Anchoring inflation expectations around the target range is imperative to prevent second-round effects, such as wage-price spirals, which can exacerbate inflationary pressures.

Amidst these considerations, the outlook for the South African economy remains contingent on several factors. The stability of the Rand influenced by external developments, commodity prices and domestic policy measures, plays a pivotal role in shaping inflation dynamics.

Moreover, addressing structural challenges, such as infrastructure deficits, is essential to fostering sustainable economic growth.

While the prospect for cutting interest rates later rather than sooner might initially evoke disappointment, it is crucial to adopt a long-term perspective. Patience and prudence in monetary policy decisions lay the foundation for sustainable economic recovery. As we navigate the path forward, a balanced approach that prioritises price stability as a contributory factor towards supporting economic activity will be paramount.

The statement will probably be “hawkish” given the risks that could feed into inflation associated with local elections, El Nino climate effects and the adverse impact of geopolitics. That said, if inflation forecasts prove correct, the SARB is expected to start normalising rates before the end of the year, albeit a shallow cutting cycle. Overall, it is important to recognise the complexity of the economic landscape. By exercising patience and prudence, the SARB can help steer South Africa towards a path of balanced and sustainable growth.

Authors: Arthur Kamp, Chief Economist and Patrick Buthelezi, Economist, at Sanlam Investments