The South African Reserve Bank (Sarb) Governor, Lesetja Kganyago said that it needs to get inflation target back on track in order to maintain consumer price growth at 4.5%.
In the month of April and May, the annual inflation rate was 5.2%, according to Reserve Bank data.
The Sarb would like to keep inflation in a range of 3% to 6%.
In the central bank's annual report published Tuesday, Kganyago said that headline price growth returned to the bank's target band in June 2023.
He explained that the headline price growth has been stuck in the top half of that range, making no clear progress towards the 4.5% midpoint objective.
“It is important that we rebuild confidence in our ability to achieve our target,” Kganyago added.
MPC to keep interest rates on hold
The bank’s Monetary Policy Committee (MPC) has been holding the benchmark interest rate at 8.25%, according to Kganyago, and this is a level he considers restrictive to achieve its target.
“The forecast from our Quarterly Projection Model shows the policy rate easing this year, moving back towards ‘normal’ levels as inflation slows,” he added.
“The upside risks to this forecast, however, are prompting the MPC to keep rates on hold. These risks include persistently elevated rates from advanced economy central banks, especially the US Federal Reserve; higher and less stable inflation expectations; and new fuel and food price pressures.
“With inflation having been above 4.5% since May 2021, it is important that we rebuild confidence in our ability to achieve our target. Looking back, South Africa’s inflation performance has been relatively benign”.
Kganyago said that it should be noted that SA has not been affected by double-digit inflation increases.
“We did not experience inflation rates as high as those in major advanced economies (for instance, US inflation peaked at 9.1%, compared with a South African peak at 7.8%). We have also not suffered double-digit inflation increases, in contrast to many of our emerging market peers,” he added.
Standard Bank and Nedbank were wrong?
Earlier this week, Standard Bank said that it believed the Sarb would cut the interest rate two times before the end of the year.
Standard Bank predicts that the first repo rate cut could be by September.
Standard Bank’s CFO, Arno Daehnke said that South Africans could expect a 50 basis points (bps) cut by the the end of 2024.
“We expect a continued commitment to the fiscal consolidation plan and ongoing traction to the growth-supportive reforms under way. This should support moderating inflation and monetary policy easing. We expect 100 basis points (bps) of cumulative interest rate cuts,” Daehnke said.
“But we expect them to be spread, with two cuts of 25bps in the second half of 2024, starting in September, and two cuts of 25bps in the first half of 2025. We had previously expected 75bps in the second half of 2024 and 25bps in the first half of 2025,” he explained.
Nedbank also predicted this line of interest rate cutting.
Last month, the bank said that it expected the Sarb to cut interest rates by at least 50bps this year.
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