MPC holds rates steady – Kganyago says Reserve Bank will do the ‘heavy lifting’ if fiscal front worsens

The Monetary Policy Committee (MPC) kept the repo and prime lending rates unchanged at 8.25% and 11.75% respectively on Thursday as it keeps a hawk eye on inflation, though the tone of its statement has become a tad more dovish as inflation has slowed. 

This was not your run-of-the-mill MPC announcement as it came the day after the general elections and was held as the results were filtering in, showing at the time a worse-than-expected outcome for the ANC, raising the potential for an ANC alliance with radical parties such as the EFF.

But the Reserve Bank has long been zealous of its independence and the pursuit of its mandates to keep inflation in check and protect the value of the currency with an eye to “balanced and sustainable economic growth.”

So in response to a question about whether future fiscal policy – clearly in the wake of the elections – would put the burden on monetary policy to do the weightlifting, Reserve Bank Governor Lesetja Kganyago replied: 

“If fiscal policy falls in a direction that could undermine macroeconomic stability, it would mean that monetary policy has to do the heavy lifting to deal with inflation, because that is the mandate of the central bank.”

Bluntly put, the Reserve Bank will carry on with its mandate regardless of the election outcome. Unless, of course, that were to lead to a change in its mandate. 

And the Reserve Bank has been doing the “heavy lifting” to contain inflation. Rates have now been unchanged for 12 months, but the MPC hiked 10 consecutive times before May of last year in a bid to douse the flames of rising prices that threatened to engulf household incomes. 

The consumer price index (CPI) was running at 7.8% in July of 2022 and has since slowed to 5.2% in April of this year. The Reserve Bank’s target range is 3% to 6%, but it really wants CPI anchored firmly in the mid-point of that range before it even considers trimming, a point it has been making consistently. 

“... we now see inflation stabilising at our 4.5% objective in the second quarter of next year. This is an improvement on our March forecast, which only reached this milestone at the end of 2025,” the MPC statement pointedly said. 

There are still expectations that the Reserve Bank could start cutting from November of this year, but its objective is stability around 4.5%. It’s also unlikely to begin trimming before the US Federal Reserve applies the scissors, and the outlook on that front changes from week to week. 

“We will rein in inflation,” the governor said, in his typically measured and deliberate manner, while reiterating what the statement said about the mid-point of the target range being its objective. 

The bottom line – and the governor is being quite transparent on this front – is that inflation needs to ease to 4.5% and orbit that decimal point for a while before the MPC starts loosening policy. 

The Reserve Bank also keeps a very close eye on the rand exchange rate, and it was volatile – which is not unusual, except for the political backdrop – as the election results were tallied and made public on Thursday. 

The rand up to that point in the day had traded in a fairly wide range of 18.45 /dlr and 18.76/dlr, and had settled around just over 18.60/dlr as the governor spoke. 

The Reserve Bank may be doing a lot of heavy lifting, but when the MPC has its next scheduled meeting in July, the rand will be dancing to the tune of the election’s ultimate outcome. And that in turn will determine the weight of the weights that the Reserve Bank will be lifting. DM