The South African Reserve Bank (SARB) has issued a warning about the potential impact of the El Niño weather conditions on food prices, which could push up consumer inflation in the months ahead and force the bank to raise interest rates once again.
This comes just as consumer inflation dipped within the SARB’s target band of 3-6% in June for the first time in nearly two years due to declining fuel and food prices, though it remained near the upper limit at 5.4%.
Headline inflation rose sharply this past year, surpassing the upper end of the 3–6% inflation target band in April 2022 and reaching a 13-year high of 7.8% in July 2022.
SARB Governor Lesetja Kganyago on Friday said that major climate events such as floods and droughts had an immediate impact on local food prices.
El Niño is a climate pattern that describes the unusual warming of surface waters in the eastern equatorial Pacific Ocean that comes with extreme weather patterns.
Scientists believe the weather patterns typically seen during El Niño are likely to send global temperatures soaring to record levels in the next few years.
South Africa has experienced numerous climate events, including the flooding in KwaZulu-Natal in 2022 and the Western Cape droughts of 2015–2018.
Kganyago said the El Niño event of 2015/2016 had pushed food inflation up to about 11% in 2016, and its reappearance later this year risked delaying the food disinflation process.
“Despite the challenges of forecasting and modelling, a repeat of the 2015/2016 drought (which is a once-in-20-years event) could increase food prices by as much as 10%,” Kganyago said.
“For now, however, such a risk lies outside of the SARB’s baseline view.”
Kganyago was speaking at the 103rd annual Ordinary General Meeting of the SARB shareholders in Pretoria.
The SARB shareholders voted in favour of the bank’s financial statements for the year ending 31 March 2023 and approved the appointment of BDO South Africa and the reappointment of SizweNtsalubaGobodo Grant Thornton as the independent external auditors for the 2023/24 financial year.
Kganyago said the frequency with which these extreme weather events, whether it was drought or floods, had actually increased and had also become erratic.
“So the challenges of climate change are here with us. We have also done a stress test of the banking sector to look at the banking sector and say, how are you dealing with this. The insurance sector seems to be more prepared. We will drill deeper under stress scenarios,” Kganyago said.
“But that means that the challenge that I face now is that I need more than just economists and accountants and finance professionals in the Reserve Bank. I now need some climatologists because we must try and figure out when these things are going to happen.”
Economists concurred that the bigger worry for food prices was the emerging El Niño phenomenon, which tends to be associated with drought conditions in South Africa and many other countries, and upward pressure on food prices.
Investec chief economist Annabel Bishop said inflation was expected to remain below 6.0% in the third quarter, dipping towards 4.5% in July before rising towards 5.0% temporarily on base effects for the remainder of the year, then likely easing towards the midpoint of the inflation target in 2024.
“Easing inflation, and potentially flat to lower interest rates next year as a result are positive for households, but there are risks to the largest component of consumer inflation, that is food prices, which are at risk from the combination of climate change and El Niño,” Bishop said.
Meanwhile, Kganyago said high inflation remained a concern and played a significant role in the SARB’s inability to achieve its target of keeping inflation within the target range of 3–6%. He said appropriate monetary policy actions had contributed to an easing of inflation, with the consumer price index at 5.4% in June, underscoring the bank’s commitment to price stability.
Kganyago reiterated that the Monetary Policy Committee (MPC) would act decisively if pressure mounted on inflation in a bid to ensure price stability in the interest of balanced and sustainable economic growth.
“Monetary policy is focused on preventing second-round effects and the risk that inflation expectations de-anchor following inflation shocks. Though the MPC has paused the hiking cycle, it will act decisively to quell any inflationary pressures should they strengthen over the medium term,” he said.
“The priority remains that inflation reaches the midpoint of the 3–6% target band (4.5%) – and stays there – to best ensure balanced and sustainable economic growth in the interest of all South Africans.”