Consumers banking on significant interest rate cuts before the elections had their hopes dashed this week when Reserve Bank governor Lesetja Kganyago held the line, keeping interest rates steady and warning that inflation remains a risk to the economy.
Sticking to the Bank’s inflation-targeting regime, Kganyago and his monetary policy committee (MPC) kept the repo rate at 8.25% and said inflation needed to settle at the midpoint of the Bank’s 3%-6% target range.
An average inflation rate in 2023 of 6% remained too high, in spite of signs of having moderated in July and August, he said, adding that inflation targeting would continue to inform the MPC’s approach as the anchor of its policy, and that the committee would consider cuts only when inflation reached and remained in the desired range.
Kganyago added there was no discernible trend showing inflation declining towards the target range. “So don’t expect us to recalibrate policy,” he said.
Not only do South Africa’s monetary authorities take their lead from the US Federal Reserve, but lowering local interest rates before the US takes the first step could expose the rand to unwanted volatility, especially in an election year (May is likely) in which the outcome of the elections is far from certain.
The Fed has kept its benchmark rate steady, disappointing investors who had hoped for US rate cuts to begin as early as March, which would be positive for US equities. Just two weeks ago, it was widely believed the US would cut rates six times this year but now only two cuts are expected, and they could take longer than previously anticipated.
Any hope, or fear, that the Reserve Bank would cave in to popular or political pressure to cut rates to ease conditions for consumers appears dead in the water.With elections looming in a time of soaring costs, high interest rates and unemployment, the Bank’s hiking cycle, which started in November 2021, has proven to be bitter medicine for the public.Most economists surveyed said the Bank had a history of resisting political pressure, with one notable exception in 1984.
Efficient Group economist Dawie Roodt said while there are examples of central banks around the world being accused of cutting rates ahead of elections, a hypothetical cut of 25bps (a quarter of a percentage point) could hardly be seen as a concession to political pressure.
“If there is a cut in interest rates of, say, 25 basis points before the election, I won’t see that as an attempt by the Reserve Bank to meddle in politics,” he said.
While there is room to cut rates before the elections by about 25bps, he said, the MPC’s decision on Thursday is a sign that Kganyago and the central bank are keeping their eyes fixed on prices.“That is what a good central bank is supposed to do — keep its eye only on the ball, and the ball in this instance is inflation. Politics should not play a role. If the governor keeps interest rates where they are until after the election, that will be a sign that he really is independent,” he said.
Independent economist Duma Gqubule said since 1994 he could not recall there being a strong link between rate cuts and elections. However, he recalled at least one instance under apartheid where that arguably had been the case.
If there is a cut in interest rates of, say, 25 basis points before the election, I won’t see that as an attempt by the Reserve Bank to meddle in politics
— Efficient Group economist Dawie Roodt
Still, he said there should be a more vibrant debate in South Africa for a developmental role for the Bank. “I have always argued that monetary policy is too important to be left to unelected and unaccountable technocrats. We need to change the approach to how the MPC is formed. We should have external members. We need people who empathise with the pain of ordinary South Africans and they [the MPC], quite frankly, don’t care,” he said.
Central banks the world over regularly review and re-evaluate their mandate and approach to monetary policy, and South Africa should follow suit rather than “copying and pasting” what the US decides.
North-West University Business School economist Raymond Parsons said that in the 103-year history of the Bank, there was only one known decision in recent decades in which the Bank’s independence and credibility were publicly called into question.
“In November 1984 there was what became known as the ‘Primrose incident’. The Bank cut interest rates just before a crucial by-election in [the Germistion suburb] Primrose (which the National Party government was desperate to win),” he said.
Shortly after the by-election, which the government won, the Bank put the repo rate back to its previous level “to great reputational fallout, though then central banker Gerhard de Kock denied the motivation attributed to him”.
Parsons said economic evidence indicated that, if the economy evolved in line with forecasts, South Africa was at the end of its interest rate hiking cycle, adding that the constitution adequately safeguarded the central bank’s independence.
“The timing of the easing in interest rates this year will presumably be decided at the point at which the Bank is convinced that inflationary expectations have become firmly anchored. The budget and the elections lie ahead,” he said.
The timing of any changes in interest rates in the next few months is likely to be mainly driven by domestic factors and the timing of US interest rate outcomes may not be the decisive element in the Bank’s decisions at present, he added.
The head of financial markets at Standard Bank Group economic research, Elna Moolman, said the MPC decision had been expected, but longer-term survey inflation expectations were low enough to accommodate a “gradual and shallow” cutting cycle of 100 to 125 basis points after May.
“The rhetoric was, in our view, slightly hawkish, with the governor still stressing serious inflation risks. But this is to be expected, given the persistent inflation risks and also that inflation and inflation expectations are still a little higher than the MPC would want,” she said.
Antswisa Capital CEO and chief economist Miyelani Mkhabela said the vision of the Bank was to maintain price stability and continue with inflation targeting. However, he said, if there was a consensus to review the mandate, the new targeting system would be used.
“The members must understand macroeconomics, monetary policy, the socioeconomic transformation of South Africa, the challenges that South Africa experienced pre-democracy and post-1994, transformation of the central bank, transformation of the financial system and understanding the individual and corporate consumers to make informed determinations,” he said.
Meanwhile, the MPC is looking to add further members, and analysts said Kganyago would be determined that only candidates considered to be firmly in favour of inflation targeting be considered.
Roodt said: “My suspicion is that Kganyago will be part of the process of appointing new members, and he is known as a real hawk. He’s an excellent central banker and I guess he will try to get people who think more or less as he does, which is a good thing.”
David Fowkes, appointed two weeks ago, was introduced as the newest member of the MPC at Thursday’s rate announcement. He previously worked in the Bank’s financial markets department.
Kganyago said, “The terms of reference of the MPC say we can include up to four staff members of the Bank. It always makes sense to have an odd number (of committee members) so the governor does not have to exercise two votes (a deciding vote).
“And so, the more the better. The maximum number is eight and at the moment we are five. When the president makes an appointment of a deputy governor, we will go to six and we will continue to search like we have been doing for another person to take it to seven.”
Asked for his thoughts on alleged plans by the ANC to march to the central bank, Kganyago said the Bank would probably receive the party’s memorandum of demands, but the MPC would not be deterred from its policy of inflation targeting.
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