South African MPC Remains Steadfast on CPI Target Midpoint

JOHANNESBURG (Capital Markets in Africa)  – The South African Reserve Bank is steadfast that it wants to see inflation expectations anchored at the 4.5 percent midpoint of its target range, Governor Lesetja Kganyago said.

While the central bank unexpectedly raised its key rate to 6.75 percent in November, its current policy stance remains accommodative with the benchmark rate still below neutral, Kganyago said in an interview on Thursday with Bloomberg Television in Washington.

Consumer inflation was below the target midpoint for the second straight month in February and will stay within the 3 percent to 6 percent range until at least of the end of 2021, according to central bank forecasts. The Monetary Policy Committee sees inflation averaging 5.3 percent next year and 4.7 percent in 2021.

The MPC welcomes the fact that inflation expectations have declined, but it wants to see more evidence of lower future prices, Kganyago said.

“For you to have lower interest rates, you have got to have lower inflation, not just yesterday’s inflation but lower inflation on a forward-looking basis,” he said.

The comments may knock expectations for a cut in interest rates this year, particularly given a recent surge in oil prices that had already pushed gasoline costs to a near-record high. The central bank is under pressure to ease policy as economic growth remains anemic.

The last time any panel member voted to ease borrowing costs was in March 2018, even as the economy went through a recession last year and will only reach 2 percent growth in two years’ time, according to central bank forecasts.

Forward-rate agreements starting in eight months, used to speculate on borrowing costs over the period, are pricing in a less than 50 percent chance of a 25 basis-point cut this year, down from about 70 percent last week.

Concrete Steps
Kganyago said the one thing that could boost economic growth is restoring business confidence. While sentiment surged after President Cyril Ramaphosacame to power and replaced Jacob Zuma following almost nine scandal-ridden years, an index tracking this fell back again and was at a seven-month low of 91.8 in March.

Restoring confidence will “entail government taking certain concrete steps on the business front,” Kganyago said. Ramaphosa’s administration has taken important policy decisions and “we need the government to implement those with resolve,” he said.