MONETARY POLICY COMMITTEE: Divided MPC holds rates for now, but sees upside risks to inflation

The South African Reserve Bank (Sarb) surprised most economists by holding interest rates steady on Thursday, but a divided vote by the six-member Monetary Policy Committee (MPC) and an assessment that inflation risks remain to the upside strongly suggest that at least one more hike remains on the cards this year. The decision to hold from the Sarb was largely unexpected as it is prone to hawkishness in the face of uncertainty – a defining characteristic of the unfolding Iran War, which the MPC statement pointedly led on. “The crisis in the Middle East has entered a new and volatile phase. Traffic through the Strait of Hormuz has picked up, and then fallen again. Oil prices, which had declined to about $70 a barrel earlier this month, have now rebounded to roughly $90,” was the statement’s opening line. “Turning to inflation, recent prints have been well above target, mainly because of higher fuel costs. Petrol and diesel prices eased this month, but global prices have now risen again. We expect headline inflation to stay above 4% until early next year... We see upside risks to inflation.”Hawkish toneThat was a decidedly hawkish tone, and as some economists anticipated, the MPC split on the policy stance, with two members voting for a 25-basis point hike and four opting to leave the Sarb’s policy rate unchanged at 7.00% and the prime rate at 10.50%. But the committee agreed that while “the outlook is uncertain, with the rate increase at our previous meeting, the policy stance is appropriate for now, with rates somewhat restrictive.” Uncertainty can also call for caution and not pulling the trigger pre-emptively. And if the Sarb’s inflation outlook gets blown out of the water between now and its next scheduled MPC meeting in September, it can always hike by 50 basis points. Governor Lesetja Kganyago noted during the media Q&A after the rate announcement that between now and September more data will emerge that will indicate if second-round effects such as wages and long-term inflation expectations are coming to the fore and “... if they are coming in, we will calibrate policy appropriately”.The Sarb sees inflation remaining above its 3.0% target until next year, and it is determined to get it back to that point. Story not all grimThe inflation story has not been all grim. At 1.4%, food inflation in June was at a 16-year low, and the effects of the rapidly strengthening El Niño are not seen as taking firm root on this front until next year. For now at least, the South African economy and consumers who use credit, homeowners with a bond and prospective buyers are less burdened than would have been the case with a hike. “After some uncertainty around the interest rate outlook after the 25-basis points hike in May, a hold provides welcome relief for homeowners and aspiring buyers. It means monthly home loan repayments remain unchanged and gives those looking to buy new homes more confidence in their planning,” said Toni Anderson, Standard Bank Head of Home Services.Asked during the Q&A about the MPC’s departure from the general consensus of a hike, the governor noted that economics was a “dismal science”. “It’s not a nice thing if you are an economist and get the call of the central bank wrong, because your bosses will ask about it. But it is a dismal science. And in this uncertain environment, you can forgive people for missing what they expected.” DM