ECONOMY

Increase of 25 basis points at the lower end of expectations

Lesetja Kganyago defends Reserve Bank's inflation focus after rate hike

Reserve Bank governor Lesetja Kganyago has again defended the central bank’s focus on inflation after announcing a 25 basispoint rate hike on Thursday, saying it had been mandated to keep prices in check.

“That we decided to target price stability was not because we woke up one day and decided we are going to target price stability,” he said. “It is because the people of this country decided it [the constitution] must comply with a number of principles. From those, there was a principle that there must be an independent institution tasked with [protecting] the value of the currency.”

Asked about an ANC resolution adopted at the party’s December conference that demanded the Bank’s mandate be broadened to include employment and growth, Kganyago said that had always featured in its statements.

“We are not pursuing price stability for the sake of it. The authors of our constitution, students of history, understood that you cannot have balanced and sustainable growth in an environment of price instability, and that price stability is a necessary but not sufficient condition for balanced or sustainable growth,” he said.

The decision of the monetary policy committee (MPC) at the first meeting of the year brings the benchmark repo rate to 7.25% and the prime lending rate to 10.75%. The MPC said its decision was informed by the dire impact of load-shedding on growth and efforts to sustainably reduce rates later.

The MPC’s rate decision, while consistent with economists’ forecasts that there will be more hikes in 2023, was at the lower end of expectations. The Bank also revised down its forecast for economic growth for 2023, from 1% to 0.3%, due to load-shedding’s impact on households and businesses.

Kganyago said the decision had nothing to do with outside expectations, but with those related to growth outlook and global inflation trends.

“What the statement says is that inflation globally is high and the public is intolerant of higher inflation.”

He said the forecast takes into account ongoing high levels of load-shedding and more modest household spending and investment, adding that these risks prompted the central bank to cut growth projections.

Duma Gqubule, founding director at the Centre for Economic Development and Transformation, said the decision and revised growth estimates were a result of Eskom’s performance and load-shedding’s impact on growth, which could result in a “calamity”.

“That’s going to result in rising unemployment and electoral disaster for the ANC in 2024. To address these two things, we need to solve Eskom in the next 12 months. I don’t agree with the [Eskom] board saying it has two-year plans but, looking at this, we must put our heads together and fix this. We are heading to an economic wasteland.”

Gqubule said the government’s fiscal and industrial policies needed to address the challenge.

“Why increase rates when Eskom is doing a destructive job of shutting down demand? What shocked them is [what] the numbers are telling them. Everyone will have to revisit the numbers for this economy.” The MPC doesn’t consider politics when making decisions, considering it “just noise”, he said, adding that the central bank looked at the cold, hard facts and decided accordingly.

Efficient Group economist Dawie Roodt said the decision was a response to a weak economy, but that a 25 basis-point hike indicated an impending end to the upward cycle.

“It was a touch-and-go situation, as only one member needed to vote for the other side and it would have been 50 pips [basis points]. It indicates they are more comfortable with inflation now. They won’t say that or say it as I’ve said it, but they feel like they are closer to the end of a hiking cycle.”

Roodt added that he was surprised to hear Kganyago’s remarks on the effects of load-shedding on the economy, signalling that growth projections for the year could be as bad as zero for 2023. He said this was a much more likely reason for the decision than pressure from the ANC.

“I think Lesetja Kganyago has proven himself to be his own man ... The ANC is in trouble and looking for someone to blame. But to say the Reserve Bank did 25 pips because of political pressure ... I don’t think so.”

Miyelani Mkhabela of Antswisa Transaction Advisory said: “The 25 basis-point increase follows the consecutive jumbo hikes of 75 basis points, which signals the Reserve Bank may be at the end of its hiking spell.”

Mkhabela said his company’s services macroeconomics, trade and investment division forecasts 2.6% growth for 2023 and 2.8% growth for 2024 as listed corporates will continue to adapt to global and domestic complexities.

FNB CEO Jacques Celliers agreed that the upward cycle may be ending, adding that since the beginning of the year load-shedding has resulted in additional unplanned expenses for struggling households and businesses.

Guiding inflation back towards the midpoint of the Bank’s 3%-6% target band could reduce the economic costs of high inflation and enable lower interest rates in future, Celliers said.

“The revised repurchase rate remains supportive of credit demand in the near term, while raising rates to levels more consistent with the current view of inflation and risks to it. The aim of policy is to anchor inflation expectations more firmly around the midpoint of the target band and to increase confidence in attaining the inflation target sustainably,” he said.

It indicates they are more comfortable with inflation now. They won’t say that or say it as I’ve said it, but they feel like they are closer to the end of a hiking cycle

Dawie Roodt

Economist, Efficient Group