Wednesday’s was the fifth straight meeting of the Monetary Policy Committee (MPC) in which it kept its key repo rate on hold at 8.25% and the prime lending rate at 11.75%. 

The reason for this holding pattern, after cumulative hikes of 475 basis points over an 18-month period, is that consumer inflation remains stubbornly over the midpoint of the South African Reserve Bank’s (Sarb’s) mandated 3-6% target range. 

“The most recent inflation numbers showed yet another delay on the way back to our 4.5% objective, with headline up to 5.6% in February. This is nearer the top of our target range than the midpoint,” said the MPC statement, read by Sarb Governor Lesetja Kganyago in a televised address. 

“We still see headline inflation heading back to 4.5%. However, given extra inflation pressure, headline now reaches the target midpoint only at the end of 2025, later than previously expected.”

The risks to the inflation outlook remain on the upside and the MPC is not about to start trimming rates until those risks subside. Indeed, an upside shock would almost certainly prompt another hike. 

The risks noted by the MPC include food prices as South Africa’s summer maize crop has been scorched by the El Niño weather pattern.

“Regarding food prices, we are at a difficult juncture. Last year, food inflation hit its highest levels since 2008. Food inflation has now slowed. But this is a critical time in the growing season, and it has been unusually hot and dry, which may cause food inflation to pick up again,” the MPC said. 

During the Q&A that followed, Kganyago pointedly noted that the Crop Estimates Committee this week slashed its forecast for the 2024 maize harvest and now sees it 19% lower than last year.

Read more in Daily Maverick: Crop Estimates Committee slashes SA maize forecast, sees 2024 harvest down 19% as El Niño bites

The MPC also has a watchful eye on the rand exchange rate, which the statement said “…has been trading somewhat weaker than we expected at our last MPC meeting. This is partly due to interest rates in the major advanced economies staying high for longer.”

Still, the governor insisted that the MPC does not dance to the tune of the US Federal Reserve.

“We watch the Fed, but we do not follow the Fed,” he said. The difference between US and South African rates raises the yield appeal of the rand and is one of its key sources of support.

The Fed has signalled that US rates may start easing from June, but don’t expect the Sarb to start trimming until domestic inflation is anchored firmly around 4.5%.

The MPC, which crafts monetary policy with an eye down the road, is also very concerned about inflation expectations.

“Inflation expectations have moderated in the latest survey. This is welcome, but two-year ahead expectations are still in the top half of our target range. Expectations are projected to ease towards our 4.5% objective as inflation slows, but we have little margin to absorb shocks so long as expectations are high,” the statement said. 

The bottom line is don’t expect lower rates anytime soon, and the political risks to fiscal stability also loom large.

“… rate cuts are only likely to come on to the agenda after May’s election. And with the polls suggesting that the ANC will lose its majority in Parliament, fiscal risks – which the MPC is factoring into its monetary policy decisions – threaten to build, particularly if the party enters coalition with the left-wing EFF,” Jason Tuvey, Deputy Chief Emerging Markets Economist at Capital Economics, said in a commentary.

“If those risks materialise, the Sarb may even decide to refrain from cutting interest rates at all this year.”

It might even have to hike because such a political scenario would send the rand into a tailspin. DM