Higher for longer, but no more hikes

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Kim Silberman, Economist and Macro Strategist, Matrix Fund Managers

Lesetja Kganyago, Governor of the SA Reserve Bank (SARB), was exceptionally dovish at today’s (23 November 2023) Monetary Policy Committee (MPC) meeting, especially relative to his usual stance and relative to October’s CPI which came in at 5.9% year-on-year (y/y) relative to expectations of 5.6%.

While this could have provided a platform for the MPC to centre the discussion on the fight against inflation, the speech focused instead on the fact that while risks to inflation were substantial, monetary policy is restrictive, wage inflation is lower and the MPC will look through temporary price shocks and focus on second round effects – or core inflation. This is important given that the surprise to inflation is very much about first round effects and very product-specific price pressures, for example potato prices rose 64% y/y and eggs 24% y/y. These do not warrant a hike in interest rates. The meeting concluded that, barring any big shocks to core inflation, the SARB is comfortable with rates at 8.25%.

Interest rates are deemed sufficiently restrictive at present to guide inflation back to 4.5%. We expect that the SARB will start to cut rates in line with the US Federal Reserve Bank (Fed), in the first half of 2024. We doubt cuts will materialise ahead of the Fed, as this may negatively impact the value of the USD/ZAR. The governor explained that SA is forced to keep rates restrictive because of sovereign risks emanating from high levels of public debt, energy supply issues, high administrative prices and public sector wage inflation which is not in line with productivity. If these factors were resolved, rates could be structurally lower relative to inflation.

The governor provided useful insights into the GFECRA (Gold and Foreign Exchange Contingency Reserve Account). Profits on gold and foreign exchange reserves can be utilised by National Treasury either by selling the reserves or by keeping the reserves and printing money. It’s not often that a central banker utters the words “printing money” as a realistic option. In the event that the SARB prints money equating to a portion of the profits of SA’s gold and foreign exchange reserves, this would need to be sterilised, or drained from circulation. This would mean the SARB would pay interest at the repo rate.

The risk highlighted by the governor was that it would need to recoup that interest from National Treasury, which is already cash strapped. Consequently, the SARB is working with Treasury and international experts to find mechanisms would that entail dealing with “the capital position of the bank.” The mechanisms were described as “complicated”. The unrealised profits are estimated at R497bn. Essentially, borrowing at the repo rate would be cheap funding for the Treasury, but it should be seen as additional debt, not a “magic pot of gold at the SARB.”