The South African Reserve Bank (SARB) has pointed to a “bumpy and protracted” path back to 4.5% inflation noting recent setbacks in disinflation efforts.
Since May 2023, the SARB has maintained its core interest rate at 8.25%, aiming to guide inflation toward the midpoint of the 3% to 6% target band.
Headline inflation eased to 5.3% in March from 5.6% in February, with the slower disinflation pace attributed partly to normalised services components and high inflation expectations.
In its April Monetary Policy Review, the SARB casts doubt on whether headline inflation will move below 5% and closer towards the 4.5% midpoint of the 3%-6% target range this year.
It highlighted the persistent upward pressure on headline inflation from administered prices and is in discussions with the National Treasury regarding lowering the inflation target.
Despite expectations of headline inflation moderating to 5.1% this year, reaching the target midpoint is anticipated only by the last quarter of 2025.
The significant increase in borrowing costs since November 2021, with the repo rate rising by 475 basis points, has strained indebted South Africans and hindered economic growth amid challenges like load-shedding and logistical issues.
The bank acknowledged the prudence of its decision to delay rate adjustments, considering that such action could have worsened inflation expectations and prolonged the return to the target.
While headline inflation has generally eased since 2022, recent setbacks in food and fuel prices have pushed it closer to the upper limit of the target band, requiring time for the return to the midpoint.
Core inflation, excluding food and energy, is expected to remain at 4.8% this year before declining to the target midpoint by the end of 2025, driven by elevated services inflation.
Factors like weakness in government bonds and rand volatility pose additional obstacles to disinflation, reflecting concerns about weak growth and fiscal sustainability.
Governor Lesetja Kganyago highlighted the importance of a lower inflation target for competitiveness, noting that maintaining a higher target could jeopardise South Africa's position compared to countries with narrower targets.
Governor Lesetja Kganyago said on Tuesday there was “no virtue in high inflation”. He “couldn’t give a number” for what the new inflation target might be, but there was no policy basis for a higher target.
Competitiveness
“It can only go lower. Those countries that we generally compare ourselves with have narrower and lower targets. If we do not revise our target we will lose competitiveness,” Kganyago said.
Governor Lesetja Kganyago said on Tuesday there was “no virtue in high inflation”. “It can only go lower.
Those countries that we generally compare ourselves with have narrower and lower targets. If we do not revise our target we will lose competitiveness,” he said.
The Reserve Bank has introduced two new metrics to enhance its grasp of underlying price dynamics, which will play a role in shaping the MPC's interest rate deliberations, with both indicators currently reflecting heightened levels.
According to Witness Simbanegavi, the editor of the SARB's biannual Monetary Policy Review, these metrics include a supercore measure and a gauge termed the persistent and common component of inflation.
These additional measures will complement headline and core price growth data published by Statistics South Africa, providing further insights for monetary policy decisions.
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