The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) starts its next three-day meeting on 21 May.
Lullu Krugel, PwC Strategy& chief economist for Africa, and Christie Viljoen, PwC Strategy& economist, offer their ideas on what will go down.
MPC members decided (unanimously) at both the January and March meetings to keep interest rates on hold, following a 25 bps increase in November 2018. Policymakers will next week consider recent economic developments and the outlook for inflation and economic growth as they debate the appropriate level for interest rates.
In January, the MPC indicated that its Quarterly Projection Model (QPM) – a broad policy guideline and not a rigid decision tool – implied a 25 bps increase in the repo rate before the end of 2021. In March, the MPC refined this forecast, indicating the upward adjustment could happen before the end of 2019. This was probably based on the SARB forecasting that inflation would increase from an average of 4,8% in 2019 and 5,3% in 2020, with the latter moving away from the mid-point of the 3%-6% target range.
However, as evidenced by recent surveys, the majority of local economists expect no change to interest rates for the remainder of 2019, and that a 25 basis point increase is only due somewhere in 2020.
It is certainly possible that analysts are remaining too focussed on the monetary policy leeway offered by the official (3%-6%) inflation target range, instead of focussing on the central bank’s recent emphasis on the mid-point of this spread. The MPC made its first explicit statement about the mid-point target in the July 2018 MPC statement, and has in recent months emphasised its desire to see inflation anchored near the 4,5% level.
MPC decisions regarding the appropriate level for interest rates are based on the central bank’s outlook for inflation. At its latest meeting, the SARB forecast average inflation of 4,4% during the first quarter of 2019. The actual mean was slightly lower at 4,2%, although this included an increase in headline inflation from 4% year-on-year (y-o-y) in January to 4,5% y-o-y in March. The lower-than-expected mean inflation reading in 2019Q1 allowed local economists to adjust their views about price trends during the remainder of 2019, contributing strongly to the view of a delayed tightening in monetary policy during 2020, rather than this year already.
Nonetheless, the SARB also flagged upside risks to its inflation outlook at its meeting in March, including rising administered prices (specifically electricity and water tariffs), rising domestic food prices, and higher international oil prices pressuring fuel costs.
Ahead of this month’s MPC meeting, SARB Deputy Governor Daniel Mminele reiterated in a speech on May 7 that these factors remain policymakers’ key focus. He indicated that recent developments in these areas “show that vigilance and data dependency must remain the order of the day” when considering the correct monetary policy stance.
On the energy front, local fuel prices have increased notably over the past four months. International oil prices have climbed more than 30% (in US dollar terms) since the start of 2019 due to a combination of factors, including geopolitical tensions and supply-side developments. As such, domestic fuel prices have been adjusted upwards in recent months, reaching near all-time highs once again. This has already had an adverse impact on production prices even before electricity prices increased. On a positive note, food price inflation stabilised at 2,3% y-o-y over the past three months.
As indicated above, most analysts foresee no change in interest rates during the remainder of this year. However, the SARB could suggest a different path next week if it flags increased upside risks to the inflation outlook, and if the QPR tells a different story from that relayed in the March post-MPC statement. Economists’ expectations in this regard will be refined once more is known about the MPC’s current view on where inflation and the rest of the economy is going over the next 12 to 18 months.
PwC expects no change in interest rates this month, but is cognisant of the risk of monetary policy tightening later this year as inflation pressures build.
While a ‘hold’ on interest rates will be welcomed, the MPC statement will certainly not be all good news. The SARB will highlight the weak state of the local economy following disappointing mining, manufacturing and employment data released in May so far.
PwC believes that SARB Governor Lesetja Kganyago will send a warning to the new Ramaphosa government that monetary policy cannot be the linchpin for stimulating the economy, and that fiscal and other policy reforms are needed to lift South Africa’s economic growth rate to a meaningful level that can reduce unemployment and inequality.