South African Reserve Bank governor Lesetja Kganyago has warned that the brighter outlook for inflation could be short-lived in light of global geopolitical tensions and the protectionist policies of the incoming Donald Trump administration in the US.
Kganyago, speaking on Thursday after the monetary policy committee cut its benchmark interest rate by 25 basis points to 7.75%, said central bank governors generally do not comment on leadership changes in other countries, but going by the US president-elect’s campaign promises the global market could expect a more protectionist approach from the world’s biggest economy.
“There is, however, a rise of protectionism around the globe and there is a concern that the protectionism that we are seeing could impact global trade, and global trade is the lifeblood of the global economy.
“If it impacts adversely on global trade, it will have implications for the global economy, and if there are responses from other players, and depending on which sectors the policies impact, yes, it could be inflationary,” Kganyago said.
“And if it does become inflationary you would expect that globally central banks would react, and that changes the dynamic and that is the uncertain environment within which we operate.”
It’s no point setting a target that is a secret because the usefulness of the target is to influence inflation expectations
— Lesetja Kganyago, SARB governor
On Wednesday StatsSA announced that consumer price inflation (CPI) had cooled for the fifth consecutive month from 3.8% in September to 2.8% in October, the lowest since June 2020, when CPI was at 2.2%.
However, the return of Trump, to the White House in January and simmering geopolitical tensions added uncertainty to the inflation outlook, Kganyago said.
The Bank’s inflation target rate, set 24 years ago, is between 3% and 6%, but Kganyago has in the past indicated that the 4.5% midpoint might be too high. When reporters suggested he might already, unannounced, be aiming for 3%, he replied: “It’s no point setting a target that is a secret because the usefulness of the target is to influence inflation expectations. So if you set a target and it’s secret and nobody knows it but you are targeting it quietly, it’s not useful as a policy anchor.”
He said the National Treasury and the Bank were continuing to investigate the merits of an inflation target adjustment and the outcome would be announced in due course.
“We have got a process with Treasury that we believe is coming to a conclusion. I can’t quite give you the timeline because the debate has become really rigorous and once that process completes itself, we will say what the target is, whatever the number is.”
Investec economist Tertia Jacobs told Business Times that the global trade dynamic would be shaped by whatever policies Trump introduced, but there were many other unpredictable factors.
“That combination of factors creates uncertainty. How sure are we that the crude price will stay at $73 per barrel? All these moving parts mean no-one is sure what the direction of travel is as we await Trump’s return to the White House in January.”
She said another cut in South Africa’s repo rate was likely in January and could be followed by a further cut in March.
“The forward-looking inflation rate means the forward-looking policy rate is around about 3.7%. From that perspective, there is leeway for them to continue to cut rates. I don’t think they will go for a jumbo cut. Things are too uncertain and too volatile, so I think they will really take it step by step.”
Matrix Fund Managers economist Kim Silberman said an upside risk to South Africa’s inflation outlook was the strength of the dollar, which has been supported by the performance of the US economy.
“The US soft-landing narrative has remained intact, and its outperformance vs the EU will increase if 10%-20% tariffs on EU exports are implemented, and if Trump follows through with fiscal stimulus. A further rand challenge is the commodity price outlook, which is clouded by China’s stubborn unresponsiveness to stimulus.”
André Roux, an economist at Stellenbosch Business School, said some observers had been expecting a rate cut as deep as 50 bps this week in light of consistently receding inflation and other positive data, but the cautious approach by the MPC was welcome.
“The ongoing turbulence at an international level… might mean that in America, interest rates might remain higher for a bit longer than initially expected. [It was] a conservative decision, but rather err on the side of conservatism than going too quickly and too prematurely.”
Raymond Parsons of North-West University’s School of Business said the Bank’s GDP growth projection of 2% by 2027 depended on sustaining domestic reform initiatives, maintaining prudent public debt levels and keeping wage settlements in line.
He said the inflation outlook now seems benign, with inflation likely to settle at about the 4.5% midpoint. Barring shocks, there is scope for further interest rate cuts early next year to underpin an economic recovery, he said.
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