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Markets & economy

The divided Committee draws a line in the sand, but gradually

At the November meeting of the Monetary Policy Committee (MPC), South Africa’s repo rate was raised by 25 basis points (bps) to 3.75%. The recent dissenting rhetoric coming from MPC members made it clear that this would be a difficult call, but the narrow 3-2 vote has tipped the scales at last.

With the October US Consumer Price Index printing at 6.2% year-on-year, the highest in around 30 years, global inflation is becoming much harder to ignore; as are rising oil prices, local electricity tariffs, and a weaker rand. Escalating SA public sector wage demands are still a key unresolved risk, which may grow well beyond economic productivity gains, having a second-round inflationary impact on national prices. South African Reserve Bank (SARB) governor, Lesetja Kganyago, highlights that if such effects take hold, it will be too late to act.

The MPC also notes with unease the calendar-year decline in rhodium, iron ore, and platinum prices against the rise in oil. This has the effect of damaging South Africa’s key export revenue while deteriorating the terms of trade and current account. Vulnerability in SA may have further crept in via a failure to use improved commodity prices to drastically reduce economic imbalances, like imprudent public debt levels.

How aggressive will the hiking cycle be?

Although the MPC’s quarterly projection model suggests a rate hike at every meeting next year, Kganyago attempted to temper this suggestion by asserting that further increases in the repo rate will be “gradual” – presumably with a weak consumer in mind. It is likely that the MPC will not want to strictly follow the guidance of the model because it does not consider SA’s feeble credit demand. Our recent inflation print of 5% year-on-year has fallen well behind that of emerging and even developed markets, highlighting the weakness in our consumer demand and the absence of a money printing regime. The only way to meet both MPC objectives – anchoring inflation and being supportive of SA’s recovery – is to move gradually.

This narrative may not have been well received by foreign exchange traders who are keen to see a more hard line being taken, given the risks of emerging markets falling behind the curve should global central banks finally begin to raise dollar and euro interest rates. The rand’s depreciation during the MPC meeting was also a classic case of our currency being thrown out with the Turkish bathwater given the lira’s violent sell-off as their inflation flies to 19.9% year-on-year, while their central bank continues to inappropriately cut rates.

The quarterly projection model suggests that the SA repo rate should rise to 6.75% in 2024, which is still some time away. Will the actual path of interest rate normalisation be gradual or rapid? The MPC prefers the former, but they are, as ever, dependent on the data. This is the conundrum of monetary policy – to be forward-looking and data-dependent simultaneously. One cannot wait to see the whites of the eyes of inflation before making a move.

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