The South African Reserve Bank Governor, Lesetja Kganyago, has challenged the setters of administered prices within the government to align the rate of the price increases to consumer prices in a bid to stave off rising inflation.
The Reserve Bank’s Monetary Policy Committee (MPC) last month kept the repurchase rate (repo rate) unchanged at a 14-year high of 8.25%, with the prime lending rate at 11.75%, after inflation ticked up to 4.8% and assessed risks to the upside.
Kganyago yesterday said administered prices such as municipal rates, water, electricity, public transport costs have been the single component in the inflation basket that has consistently risen faster than the inflation rate.
He said that an intervention from the government, as the authority responsible for administered prices, could help ease the rapid rate of inflation which has compelled the Reserve Bank to keep interest rates high.
“That means that we can arrest inflation if the price setters in government set the pace of their price increases consistent with the inflation target,” Kganyago said.
“But there is something naughty that local governments do. They say to you we are increasing rates and taxes by 5%, and then they go and revalue your house and then say “now your house is worth this much” and you end up paying more anyway.
“And then you look at these things and say how could anyone justify re-evaluating my house by 10% or 20% when the inflation rate is at 4.8%. So municipalities are actually making the situation difficult.”
Kganyago was speaking at the PSG Financial Services’ Think Big Series hosted by renowned financial journalist and broadcast anchor, Alishia Seckam, in Johannesburg.
Although the Reserve Bank maintained a hawkish monetary policy stance last month, it said guiding inflation back towards the midpoint of the 3-6% target band reduces the economic costs of high inflation and will achieve lower interest rates in the future.
It said the MPC had recommended additional means of lowering inflation that were within the reach of the public sector, including achieving a prudent public debt level, increasing the supply of energy, moderating administered price inflation and keeping real wage growth in line with productivity gains.
There has been growing concern within the markets that the Reserve Bank will not begin cutting the borrowing costs soon as the US Federal Reserve (Fed) looks to another 25 basis point hike in a bid to reach its 2% inflation target.
Momentum investments economist, Sanisha Packirisamy, said yesterday that interest rate cuts were still seen to be some way off as central banks were likely nervous to prematurely declare a victory on taming inflation.
“Monetary policy is likely to remain reasonably restrictive to keep inflation expectations at bay, and as such we expect up to three interest rate cuts in 2024 to end the year at 7.5% with up to 100 basis points worth of cuts pencilled in for 2025,” Packirisamy said.
Investec’s chief economist, Annabel Bishop, was less optimistic, saying the Reserve Bank could now start cutting rate hikes only in the second half of next year, not in the first half, as the US had warned that interest rates need to stay higher for longer.
“South Africa is likely to push out its interest rate cut cycle to align with the US in this regard, but the delay in the cut cycle has likely also contributed to undermining the rand, with South Africa’s first rate cut likely to follow the US, now expected in July 2024 previously March 2024,” Bishop said.
The Reserve Bank is forecasting economic growth of 0.7% for 2023, a promising upward revision from the July figure of 0.4%, and 1.0% for 2024.
Kganyago yesterday said the main thing that had been driving economic activity recently was the investments being made in embedded generation.
However, he said the key constraints to desired economic growth remained the logistics bottlenecks, the energy crisis and lower levels of education.