Central banks must aim for ‘soft landing’ as they start cutting rates, says Kganyago

The SA Reserve Bank is widely expected to start a rate-cutting cycle in September, supported by local and global inflation trends and improved sentiment in SA after the elections and formation of the government of national unity.

However, members of the Bank’s monetary policy committee (MPC) and governor Lesetja Kganyago told journalists there was still uncertainty about the trajectory of certain volatile drivers of consumer inflation such as food and fuel.

During a recent engagement with journalists in Johannesburg, Kganyago said the risk environment for inflation remained volatile.

SA consumers have been under much pressure over the past two years amid high inflation and interest rates. The repo rate was last adjusted in May 2023 when the Bank raised the rate by 50 basis points (bps) to a 15-year high of 8.25%. Borrowing costs have surged 475bps since November 2021, putting pressure on indebted South Africans and the economy.

In its July statement the MPC said that while the forecast had improved, the balance of risks was assessed to the upside, prompting the decision to hold off on a rate cut.

Uncertainty about how the rand would perform continued to underpin upside risks for food and fuel price inflation.

However, inflation has moderated markedly since the beginning of the year. This and a more positive rand performance since after the elections, a softening in inflation globally and a growing expectation the US Federal Reserve might start cutting rates in September have contributed towards markets now pricing in rate cuts of at least 25bps in SA in September and November.

According to its most recent update, the Bank expects inflation to return to the midpoint of its 3%-6% target band in the fourth quarter of 2024, after previously forecasting price increases would dip below 4.5% only by the second quarter of 2025.

Headline consumer price inflation for this year is projected at 4.9%. In July, SA’s consumer inflation dipped below 5% for the first time in a year, easing to 4.6% from 5.1% in June.

However, Kganyago said that despite the “disinflation process, under way gradually” and the slowdown in inflation, there was still no space for complacency — signalling the Bank’s pace and scale of monetary easing could be gradual while uncertainty about risk pressures remains.

“We can’t be complacent. The challenge with monetary policy is we have to deal with uncertainty. A year ago, we saw inflation at 4.7% but the risks to the outlook we identified at the time materialised, and inflation increased again.

“Now we are at 4.6%, and again we need to be mindful of possible risks to the outlook,” he said.

Still, the Bank expects inflation to moderate to about 4.5%, the midpoint of its target, in the coming months.

“At the moment it looks as if we will average an inflation rate of 4.5%, which is in line with our target,” said Kganyago. “We see disinflation under way globally. This is partly as constraints on global supply chains continue to ease.”

But, said Kganyago, central banks acted too late to curb inflation as economies emerged from pandemic-related lockdowns. Now they ran the risk of acting too early because they might think “we have arrived in terms of disinflation”.

The questions central banks must grapple with was whether high inflation had truly been “conquered”, and if they should act now by cutting rates gradually to ensure “a soft landing instead of a hard landing”.

erasmusd@businesslive.co.za