ARTHUR KAMP: MPC unlikely to halt rate hikes this week

The upside surprise — albeit small — in the February consumer price inflation print, and the weak bias of the rand exchange rate, are two reasons the SA Reserve Bank’s monetary policy committee (MPC) can be expected to lift its repo rate again this week. On balance, a 25-basis-point increase seems most likely.    

This may seem harsh given the parlous state of the economy. After all, real GDP contracted 1.3% (not annualised) in the fourth quarter of 2022. Although this followed a robust bounce of 1.8% (not annualised) in the third quarter, it is clear infrastructure constraints related to electricity supply and transport networks continue to act as a major drag on 2023’s growth prospects. At the same time, looking ahead, weaker terms of trade are also set to act as a constraint.  

Arguments for a pause, at the very least, in the current interest-rate hiking cycle are likely to focus on the weakness in real economic activity. However, one expects the MPC to remain keenly focused on its stated objective to lower the annual advance in consumer price inflation (CPI) towards the midpoint of its 3%-6% inflation target range.  

In February headline CPI recorded an annual advance of 7%, up from 6.9% in January, while core inflation increased to 5.2% from 4.9% over the same period. Although inflation is likely to slow significantly over the next year, the February data print is probably just disappointing enough to prompt another interest-rate hike.   

Meanwhile, since SA is a small, open economy, inflation expectations and outcomes are vulnerable to persistent currency weakness. The causes of rand weakness are numerous, but to the extent it reflects US interest-rate hikes the case for another domestic interest-rate hike is solidified. That said, the Bank is expected to switch to pause mode after this MPC meeting, assuming limited changes to its medium-term inflation forecasts and an expected pause by the US Federal Open Market Committee.

In the US, a structural labour market shortage and high services inflation fuelled by the post-pandemic recovery in services activity still hold significant risk to the inflation outlook. US core inflation has remained disappointingly sticky in the opening two months of this year. However, expected curtailment of credit extension given developments in the US banking sector should do much of the work for the Federal Reserve from here. US recession risk continues to linger as firmer-than-expected real economic activity in the first quarter of this year is expected to give way to the negative impact of a marked tightening in lending standards.  

Monetary policy-making is becoming increasingly complex.  Should inflation targets be set higher, risking a loss in central banks’ credibility? Should there be greater flexibility in the implementation of inflation targets? Should the growth objective outweigh the inflation objective in the current set of circumstances?  

The US Federal Reserve is still keenly focused on the inflation objective, using its lending tools to address banking sector stress while hiking its policy interest rate to target inflation. However, the debate over central banks’ inflation targets seems set to intensify. 

If this debate gains traction abroad it is likely to extend to domestic policy-making circles. If so, it should be noted that SA is a small, open economy that is regularly buffeted by external shocks. Anchoring inflation expectations and guiding inflation outcomes towards the desired level is difficult enough without the added complication of a growth objective.

With regard to the latter, there is a strong argument to be made that SA will be better served to fix infrastructure and focus on supply side elements of the economy to lift growth.    

• Kamp is chief economist at Sanlam Investments.