No interest rate cuts soon despite inflation drop
Mbongeni Mguni | Monday June 26, 2023 06:00
The central bank raised interest rates three times last year, by a collective 151 basis points as it fought escalating inflation which peaked at 14-year highs in August. However, since then, inflation has been falling – largely due to lower fuel prices and base effects – and in May, dropped to a two-year low at 5.7 percent.
The BoB last week said it expects inflation to remain within the three to six percent objective range going into the medium term. The central bank had previously expected inflation to revert on a sustained basis to the objective range from the second quarter of 2024.
Factors associated with the forecast of cooling inflation the absence of upward adjustment of administered prices, subdued domestic demand, projected appreciation of the pula against the South African rand and zero rating of a select number of items from Value Added Tax. Threats to the outlook include international commodity prices increasing beyond current forecasts, the persistence of supply and logistical constraints, as well as the reversal of global economic integration, specifically geo-economic fragmentation.
Consumers had hoped that with subdued domestic demand being part of the reasons inflation is falling, the central bank’s Monetary Policy Committee (MPC) would find room for easing rates, particularly given the benign inflation outlook.
BoB executives said despite the drop, interest rate cuts were not on the horizon in the short term.
“Inflation at its highest had hit households very hard and the fact that we are beginning to see headline inflation numbers receding somewhat is a positive thing that we need to continue to support,” Governor Moses Pelaelo said in response to BusinessWeek enquiries. “It’s very important that you always look at the balance of the risks, whether they are up or down, and ensure that you are doing the proper thing. “We must also stress that these are projections based on what we know now and what we can forecast, but the world changes and can change very quickly. “So we need to be very, very focused on this and clearly there are geopolitical tensions around the globe and some issues that may materialise including the fact that we don’t know how these wars will pan out.”
Deputy Governor Tshokologo Kganetsano said by keeping interest rates where they are, the central bank was guiding inflation expectations in the economy.
“Having come from as high as 12% inflation, now forecasting it to fall to within the objective range, the expectations of high inflation are still lingering in the market and therefore we need to, first of all, entrench expectations of low inflation going forward, before we could ease. “In our last quarterly Business Expectations Survey, firms had indicated that they expect inflation to remain higher than six percent and so with the latest developments and what we are projecting now, we wait to see the next survey how our policy actions are influencing those expectations. “Expectations are key and if businesses expect inflation to remain elevated, they will then capture those expectations into their pricing decisions and therefore, we have to anchor that first before we can consider easing.”
Kganetsano’s fellow deputy governor, Kealeboga Masalila, told BusinessWeek that keeping interest rates where they are was helping real returns for savings which in turn encourages investment in the country. He said price stability helps domestic industries remain competitive and facilitates greater production in the country, which in turn leads to growth.
Meanwhile, analysts at Kgori Capital expect that inflation in July will drop below three percent due to this week’s fuel price reductions and the impact of base effects.
“Our forecast remains consistent with the expectation that inflation will gradually increase starting from July, reaching its highest point in February 2024,” the analysts said.
Kgori Capital also expects that no interest rate cuts will be effected this year.