As was expected, the Monetary Policy Committee (MPC) unanimously decided at a fourth consecutive meeting on 25 January (its first meeting of 2024) to again keep interest rates unchanged and therefore higher for longer.
Prof Raymond Parsons, economist from the North-West University (NWU) Business School, says the tone of the MPC’s statement remained highly cautious, as it did not see the battle against inflation as yet having been permanently won.
“The MPC still saw upside risks to inflation in South Africa against the background of global uncertainties, inflationary expectations and sensitivity to currency weakness.”
Prof Parsons points out that there is nonetheless positive economic data that generates the real prospect that, both globally and in South Africa, inflation is beginning to unwind this year and may become less entrenched.
He says in South Africa inflation remains within the inflation target range of 3% to 6% of the South African Reserve Bank (SARB), with both headline inflation and factory gate inflation again easing further in December 2023. The definitive core inflation trend is still unchanged at the 4,5% midpoint of the SARB’s target for now.
“The economic evidence therefore indicates that, if the economy now evolves in line with forecasts, South Africa is at the end of the interest rate hiking cycle. Borrowing costs, although still in restrictive territory, could begin to decline slowly later in 2024. The timing of the easing in interest rates this year will presumably be decided at the point at which the SARB is convinced that inflationary expectations have become firmly anchored.”
Prof Parsons says the budget and the 2024 elections still lie ahead. According to him it was inevitable that the MPC had to slightly reduce its gross domestic product (GDP) growth forecast for 2023 to 0,6% from its previous 0,8%, which may mean that its retained growth forecast of 1,2% in 2024 may be a little on the optimistic side.
“A worrisome recent negative signal on the economic activity front was the November 2023 contraction of -0,4% in the Reserve Bank’s composite leading business cycle indicator, for the first time since May 2023.”
Prof Parsons says the modest growth outlook again emphasises the extent to which growth-orientated policies and projects, such as resolving the transport and energy bottlenecks, still need to be implemented urgently to achieve higher job-rich growth rates.
“These priorities remain imperative if South Africa is to ensure that the tailwinds will prevail over the headwinds in shaping the country’s economic performance in 2024. In response to a question at the media conference, SARB governor Lesetja Kganyago indicated that a process was now under way not only to fill the current vacancy of a deputy-governor, but also to enlarge the MPC from its present five members to seven members in due course, as permitted by its terms of reference.”
Prof Parsons concludes that this is a positive development, as it brings the MPC up to its full strength and more in line with global best practice.
