South African Central Bank Governor’s Comments on Rate Decision
JOHANNESBURG (Reuters) – Below are some quotes from Reserve Bank of South Africa Governor Lesetja Kganyago as he announced the central bank’s latest interest rate decision on Thursday.
INFLATION
As economic growth slows globally, inflation continues to surprise on the upside. Sustained political accommodation, supply shortages and other restrictions have sharply increased the prices of many goods, services and commodities.
Increases in producer prices continue to feed through to wages and consumer prices around the world. Our G3 inflation estimate is revised up to 7.0% in 2022 (from 6.9%), up to 3.5% in 2023 (from 3.0%), and slightly higher to 2.1% in 2024.
Despite the reduction in global food price inflation, local food price inflation is revised upwards and is now expected to be 8.1% in 2022 (from 7.4%). Food price inflation is revised down to 5.6% (from 6.2%) in 2023 and remains unchanged at 4.2% in 2024.
The Bank’s forecast for headline inflation for this year is unchanged at 6.5%. For 2023, headline inflation is revised down to 5.3% (from 5.7%), due to lower inflation forecasts for food, fuel and core inflation for the next year.
Headline inflation of 4.6% is expected in 2024 (instead of 4.7%).
Our forecast for core inflation is unchanged at 4.3% in 2022, and below expectations at 5.4% (vs. 5.6%) in 2023. The forecast for 2024 is also slightly lower at 4.8% (compared to 4.9%). The rise in prices for services is broadly unchanged.
Core goods price inflation is expected to decline each year, however, largely due to a lower starting point for vehicle and soft drink inflation.
Risks to the inflation outlook are rated on the upside. While global producer and food price inflation has eased, Russia’s war in Ukraine continues, with negative effects on global prices.
Average observed future inflation expectations have risen to 6.5% for 2022 and 5.9% for 2023.
ECONOMIC GROWTH
This year, the South African Reserve Bank expects the South African economy to grow by 1.9% (instead of 2.0%).
Growth in the first quarter of this year surprised on the upside, at 1.7%. In the second quarter, flooding in Kwa-Zulu Natal and higher load shedding contributed to a contraction of 0.7%.
Growth in the third and fourth quarters is expected to be 0.4 and 0.3 percent, respectively.
The economy is expected to grow by 1.4% in 2023 and 1.7% in 2024, above previous projections.
With a low potential rate, our current growth forecast leaves the output gap broadly unchanged. The output gap is still expected to turn positive in the second quarter of 2023.
DECISION
In this context, the MPC has decided to increase the repurchase rate by 75 basis points to 6.25% per annum, effective September 23, 2022.
Three members of the Committee preferred the announced increase. Two members preferred an increase of 100 basis points.
The level of the redemption rate is now closer to the level that prevailed before the start of the pandemic.
The revised trajectory of redemption rates continues to support demand for short-term credit, while raising rates to levels more in line with the current view of inflation risks.
The objective of the policy is to anchor inflation expectations more firmly around the midpoint of the target range and to increase confidence in achieving the inflation target in 2024.
Bringing inflation back to the midpoint of the target range can reduce the economic costs of high inflation and allow for lower interest rates in the future.
(Compiled by James Macharia Chege)
