The central bank’s Monetary Policy Committee (MPC) raised interest rates by 75 basis points (bps) on Thursday, taking its hiking cycle since November 2021 to 350bps and the prime lending rate to 10.5%. The bank is concerned about broadening inflation pressures, but two of the five MPC members voted for an increase of 50bps, suggesting the tightening pace may slow. 

The split decision belied the hawkish tone of the statement read by SA Reserve Bank Governor Lesetja Kganyago.  

“Risks to the inflation outlook are assessed to the upside. Despite the easing of global producer prices and food inflation, Russia’s war in Ukraine continues, with adverse effects on global prices generally. The oil market is expected to remain tight, with upside risk to prices. Electricity and other administered prices continue to present clear medium-term risks,” the statement said.  

Consumer inflation in October ticked up to 7.6% on an annual basis from 7.5% in September, below its 13-year peak in July of 7.8% but still well above the SA Reserve Bank’s 3%-6% target range. Pointedly, the governor noted core inflation — which strips out food and energy prices — as a signal that inflation is broadening after it spiked in October to 5.% from 4.7% in September. 

“We have seen this narrative in South Africa that says that this inflation is just external, it’s just supply shocks and so forth, and we must look through it,” Kganyago said during the televised Q&A that followed the announcement. “Which is what we did from early 2021, we looked through this shock until we saw that there was evidence that inflation was beginning to be broad-based, which is when we started to adjust policy in November.”   

Visit Daily Maverick’s home page for more news, analysis and investigations

He highlighted core inflation, which removes the energy and food prices that are at the heart of the external shock. 

“We still find that core inflation has risen significantly over the past 12 to 18 months, and yesterday it surprised when it hit 5%. If anyone wanted a measure that inflation was beginning to be broad-based, that would be it,” the governor said.  

“Unfortunately, there is nothing that we can do about October’s inflation or September’s inflation, that is water under the bridge. We can do something about future inflation … it is important that the central bank continues to deploy its instruments to tame the monster of inflation,” he said.  

That is certainly a hawkish stance, but the consensus was for a 75bps or 100bps hike. The fact that two members preferred 50bps suggests that while monetary tightening will be maintained in 2023, the hikes will be smaller. It’s still tough medicine for the South African consumer to swallow, but the inflationary alternative is also a bitter pill.  

The SA Reserve Bank also downgraded its forecasts for gross domestic product (GDP) growth for this year in the face of rolling electricity blackouts. 

“We now expect the South African economy to grow by 1.8% (from 1.9%) this year. Despite considerable volatility in monthly indicators, GDP growth of 0.4% is still expected in the third quarter. Fourth-quarter growth is forecast to be only 0.1%, largely due to record load shedding,” the MPC statement said.  

So, economic growth is slowing, rates are rising and will continue to do so, and inflation is becoming more broad-based. But the “monster” of inflation, which extracts its greatest toll on the poor and working class, would be worse were it not for the SA Reserve Bank’s actions thus far. The “water under the bridge” that the governor spoke about might have been a torrent, and the central bank is building a dam to stem the future flow. DM/BM