Sovereign Analysis /
South Africa

Our discussion with the South Africa Reserve Bank

  • Price pressures comparatively subdued, with inflation projected to peak this quarter just above the SARB’s 3-6% target

  • ZAR depreciation unlikely to have large inflation passthrough and rise in expectations likely transitory but with risks

  • External and domestic shocks increase uncertainty, with timing, pace, and size of normalization cycle up in the air

Our discussion with the South Africa Reserve Bank
Tellimer Research
2 May 2022
Published byTellimer Research

We hosted a webinar on 28 April with Christopher Loewald, Head of the Economic Research Department and MPC Member at the South African Reserve Bank (SARB). Our key takeaways are outlined below. These words are our own and not those of the SARB. We thank Dr Loewald for his time.

Amid rising global inflation, price increases in South Africa have been relatively moderate, with headline inflation reaching 5.9% yoy in March and core inflation reaching 3.8% yoy, within the SARB’s 3-6% target range. Further, prices have evolved largely in line with the SARB’s projections from the March MPC meeting, which saw inflation peaking at 6.2% yoy in Q2 before falling gradually to 5.4% by year-end. 

Against this backdrop, the SARB doesn’t tend to think of its rate hiking cycle as needing to be in lockstep with the Fed, given a relatively more benign inflation backdrop. That said, there is much uncertainty about the future path of prices and the policy rate amid large external and domestic shocks, including increased loadshedding and severe flooding in the province of KwaZulu-Natal.

While recent ZAR depreciation may imply that a more aggressive hiking cycle is needed, passthrough to inflation has weakened in recent years (and possibly even more so post-Covid). Rising inflation expectations could be more concerning if they begin to impact wage and price setting, but it seems to be largely driven by backward-looking fuel and food prices rather than a de-anchoring of expectations.

Muted longer-term inflation expectations and an improved fiscal trajectory from the ongoing terms of trade shock have helped anchor longer-term rates even as short-term yields tick up, resulting in a bear flattening of the yield curve. Fiscal policy will likely be the key driver of long-term rates moving forward, with less sensitivity to monetary policy at the longer end of the curve.

Potential growth remains low (0.8% this year, according to the March MPC projections), with the recent uptick in investment not sufficient to warrant an upgrade. While there have been renewed efforts by the government to boost investment in the struggling electricity sector, regulatory hurdles have stunted progress and contributed to a generally low level of investor confidence.

The proposal to switch from a liquidity deficit to a liquidity surplus implementation framework for monetary policy should improve market efficiency and lower the cost of liquidity sterilisation, but it isn’t yet clear when the switch will be finalised and what the impact will ultimately be. As such, the SARB will tread cautiously when implementing the change to minimise the risk of disruptions.

The debate on lowering or switching to a point inflation target was more active in prior years when inflation sat at top of the target band, but remains a point of discussion. The SARB is waiting for the National Treasury to finish its macro policy review to continue those discussions, but there is broad agreement that a wide target band imposes an efficiency loss and increases the cost of disinflation.

The next MPC meeting will take place on 19 May, with the market currently pricing in just over a 50% chance of a 25bps rate hike. That said, with the market pricing in more than 225bps of hikes over the next year, there will be much debate on the timing, pace and size of future hikes moving forward (with two of the five MPC members voting for a 50bps hike in March versus the 25bps that was delivered).

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