ARTHUR KAMP: Time for the MPC to take the foot off the accelerator

The SA Reserve Bank’s monetary policy committee (MPC) should take its foot off the interest rate accelerator. Price pressures are beginning to fade. Lower soft commodity prices and improving global supply chains are driving price inflation lower around the world.

In SA, domestic intermediate manufactured goods price inflation slowed to 8.6% in November from 23.1% a year earlier. This is feeding through into lower final manufactured goods prices. Though the latter was still elevated at 15% in November, the domestic manufacturing purchasing managers’ index (PMI) decreased by 11.5 points in December. The index is now 31.5 points lower than its peak in March 2022 and points to continued disinflation at manufacturing level.

In turn, lower goods price inflation underpins expectations of a material slowdown in domestic consumer price inflation from 7.2% in December 2022 to close to 4.5%, the Reserve Bank’s effective target, by end 2023. The economy is far from overheating. Even though the latest available real GDP print surprised strongly to the upside in the third quarter, advancing 6.6% seasonally adjusted and annualised, domestic final demand has stalled. Household consumption plus fixed investment spending decreased by 0.1% (not annualised) in the quarter.

Dimmed growth prospects

Economic growth prospects have also dimmed appreciably. Amid seemingly endless load-shedding and a significant decrease in SA’s terms of trade (due to lower commodity export prices), it seems the economy will battle to eke out real GDP growth of just 1% this year, implying an output gap of 0%.

At the same time, though the annual advance in credit extension has lifted in nominal terms, the increase in real credit extension is moderate and households have been deleveraging. Meanwhile, the lagged impact of last year’s interest rate hikes must still be fully felt.

Admittedly, there is still plenty for the MPC to worry about. Even though core inflation (headline CPI excluding food, nonalcoholic beverages, fuel and energy) eased to 4.9% in December from 5% in November, it is sticky and is expected to end 2023 above 5%.

At the same time, the fourth quarter inflation expectations survey of the Bureau for Economic Research (BER) shows average inflation expectations for 2023 increased from 5.9% to 6.1% and from 5.3% to 5.6% for 2024.

Also, the US Federal Reserve matters, and there is upside risk to the outlook for the US Federal Funds Target Rate. Projections from the December 2022 federal open market committee (FOMC) meeting, released by the Federal Reserve Board members and Federal Reserve Bank presidents, reflect a median projection for the appropriate target level for the federal funds rate of 5.1% at end 2023.

However, it is possible that the structural labour shortage in the US could keep the advance in worker earnings above the level deemed consistent with the Fed’s inflation target, implying upside risk to the projected interest rate path. More aggressive monetary policy tightening by the Fed than currently expected would likely hurt the rand and lift inflation expectations further. Alternatively, commodity prices could rebound, placing renewed upward pressure on domestic food and fuel prices.

Rate hike cycle

But here’s the thing: The Reserve Bank has front-loaded its interest rate hiking cycle. A lot of the heavy lifting has been done. The repo rate has increased from a low base. Yet, at 7% the policy interest rate is significantly above the year-end level for 2023 of 6.55%, projected in November by the Bank’s Quarterly Projection Model (QPM).

To be clear, the QPM is merely a guide for MPC members, who are not bound by it. However, if the monetary authorities are confident in their macroeconomic forecasts, which are likely to continue showing inflation in line with the inflation target over the medium term in an environment of low real GDP growth, there is an opportunity — after, say, two further 25 basis point (bps) interest rate hikes, including this week’s expected increase — to look towards a pause, if not an end to the interest rate hiking cycle.

• Kamp is chief economist at Sanlam.