Reserve Bank governor Lesetja Kganyago said the monetary policy committee was prepared to anchor the inflation-targeting policy even in the face of a potential coalition government that might pursue an opposing fiscal policy.
He addressed reporters after announcing that the repo rate would remain at 8.25%, a day after elections in which the cost of living was a major campaign issue.
Asked if the central bank was taking note of indications that the ANC’s apparent fall below the 50% mark may force a coalition, Kganyago said the Bank would focus on fighting inflation even if a fiscal dominant approach in a new government brought fresh debt risks.
“When you are faced with a situation where monetary policy has to do the weightlifting to try and support growth and, in the process, keep its eye off inflation and generate inflation surprises, economists call that fiscal dominance.
“And if we were to enter the era of fiscal dominance, the only protection you have against fiscal dominance is an independent central bank with a clear mandate, a clear policy anchor and a track record of executing that mandate and pursuing that anchor. And in South Africa, you have such.”
Early election results indicated that the ANC would for the first time in 30 years lose its outright majority and would need the help of a coalition partner to continue governing. The party was hovering at around 43.28% on Friday morning with more than half the voting districts counted.
It is unclear which coalition partner the ANC would choose. Potential suitors include the EFF and the MK Party, both of which favour radical policies involving tinkering with the Bank’s mandate to respond to broad economic challenges such as unemployment and growth.
However, it could consider entering into a coalition with the DA, which was hovering around 24% by Friday morning, or a cluster of smaller parties to help push the ANC beyond the 51% necessary to form a government.
Kganyago said even though inflationary pressures were not as bad as anticipated earlier in the year, the work of bringing inflation to the midpoint range was not yet done, indicating that while rate cuts may come sooner than previously expected, they only anticipate them next year.
He said should fiscal policy be tinkered with by whatever government emerged after the elections, it would be up to monetary policy to keep inflation in check.
If fiscal policy falls in a direction that could undermine macroeconomic stability, it would mean that monetary policy has to do the heavy lifting to deal with inflation because that is the mandate of the central bank.
— Lesetja Kganyago
“If fiscal policy falls in a direction that could undermine macroeconomic stability, it would mean that monetary policy has to do the heavy lifting to deal with inflation because that is the mandate of the central bank.
“A key driver of the country risk premium is actually the trajectory of fiscal policy ... We will know once government is formed what the fiscal policy of the new government is.”
While the governor sent all the right signals, economists were frank about the political implications of the various potential coalitions for fiscal as well as monetary policy.
Treasury economist at Investec Tertia Jacobs said next month’s state of the nation address by the next president would set the tone for any significant changes to fiscal policy.
“This [risk of change to government’s fiscal policy] certainly presents a major risk to monetary policy as the country risk premium impacts interest rate decisions. The June Sona will provide insight into the new administration’s fiscal priorities.”
She noted that the message delivered during this week’s MPC meeting was “slightly dovish from a very hawkish assessment” at the rates announcement in March. She added that the potential for lower inflation from September aligned with vigilance for potential policy changes stemming from the election results.
“For now, the rates remain on hold with the key focus on the outcome of elections and how the policy stance in various areas will unfold. But I do think if things play out according to baseline forecasts in the coming months, there will be interest rate relief coming for consumers and businesses in late 2024.”
She said this could pave the way for two potential 25 basis point rate cuts in November and December due to the risk assessment being broadly balanced for the first time since 2021.
North-West University Business School economist Prof Raymond Parsons said a dominant theme in the MPC statement was “unusually elevated uncertainty” in assessing the economic outlook, including political uncertainty in South Africa and trends in the country's risk premium.
“The quarterly North-West University Policy Uncertainty Index, due at the end of June, will again calibrate any changes in the level of policy uncertainty in the aftermath of South Africa’s pivotal 2024 elections,” he said.
Old Mutual Group chief economist Johann Els said the timing of the MPC announcement, a day after the elections, had to have been a consideration in the face of potentially choppy markets.
“Even if the Sarb had considered a rate cut, the timing would probably not have been appropriate given the proximity to the national elections and the potential volatility in the currency markets that might arise from the election results.”
He said in recent weeks there had been significant strengthening of the rand, which further complicated the decision-making process for the Bank.
Though President Cyril Ramaphosa extended Kganyago’s term for another five years in March — in what appeared to be a move to protect the central bank from political meddling — factions of the ANC and EFF have mulled policies to allow the government to intervene in monetary policy, including proposed legislation to give the finance minister veto rights over the MPC.
Anchor Capital investment analyst Casey Sprake said the Reserve Bank took the cautious approach with rates as it now forecasts inflation stabilising at 4.5%, the midpoint of its target, in the second quarter of 2025.
“While this is an improvement on its March forecast, which only reached the target at the end of 2025, average inflation for 2025 is only one-tenth of a percentage point lower.”
She said the Sarb remains clear in its communication that the task of achieving its inflation objective has not yet been completed, and thus, it remains steadfast in its pursuit.
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