Reserve Bank's MPC likely to hold rates steady this week as inflation sparks fires

There is one set of domestic economic news this week that will be high on the Monetary Policy Committee’s (MPC's) radar screen.

That will be the Crop Estimates Committee’s (CEC's) second production forecast for South African maize and other summer grain crops, which will be released on Tuesday at 2.30pm.

In its first production estimate for this season’s crop, released a month ago, the CEC forecast the maize harvest would fall 12.6% to around 14.35 million tonnes from 15.43 million tonnes last year. Worryingly, production of the staple white maize was pegged 17.2% lower to just over 7.04 million tonnes.

Read more in Daily Maverick: Crop Estimates Committee forecasts 12% fall in SA maize production

This was largely because of a late summer drought linked to the El Niño weather pattern, and things have since gone from bad to worse, with the CEC expected to slash its previous estimate. Food inflation has been slowing, but a poor maize harvest will reignite food price pressures.

This will be among the MPC’s many concerns as it strives to bring inflation down to the midpoint of its 3% to 6% target range. South Africa’s Consumer Price Index (CPI) accelerated in February to 5.6% from 5.3% in January.

Read more in Daily Maverick: South African consumer inflation accelerates in February, trajectory bodes ill for rate cuts

“We expect the MPC to leave interest rates unchanged ... The Governor has repeatedly stressed that the MPC wants to see headline inflation trending towards the 4.5% midpoint of the target range in a compelling and consistent manner before considering rate cuts. Clearly, headline inflation is not there yet,” Nedbank said in a commentary.

“... the MPC will likely maintain that the risks to the inflation outlook remain tilted to the upside given the threats posed by the ongoing geopolitical conflicts and adverse weather conditions to food and energy prices.”

Two things need to happen for the MPC to consider cutting its key repo rate from 8.25% and the prime lending rate from 11.75%.

The first, as Nedbank notes, it wants to see inflation anchored firmly around 4.5%.

The second is that the MPC is unlikely to cut before the US Federal Reserve makes its move as the rate differential between the two economies helps to support the vulnerable rand’s exchange rate with the greenback. The Fed last week left rates unchanged at between 5.25% and 5.5%, but signalled the prospect of three cuts before the end of this year.

The challenges faced by the US and South African central banks are starkly different. Inflation in the US is partly a consequence of a robust economy, with an unemployment rate near historic lows below 4%.

South Africa’s economy is not expected to grow by more than 1.5% this year and the unemployment rate is in effect well over 40% based on its broadest definition. Unlike the US, domestic demand pressures are muted to say the least.

South African retail trade sales fell 2.1% on an annual basis in January and 3.2% on a seasonally adjusted monthly basis. And the FNB/BER Consumer Confidence Index (CCI), released on Monday, showed it had only improved marginally to a still dismal -15 in the first quarter (Q1) of this year from -17 in Q4 2023.

“Given a long-term average CCI reading of zero (since 1994), the latest reading of -15 points to a consumer that is still very much under pressure,” FNB said.

Part of this pressure stems from elevated interest rates. But the MPC with the laser-focused Governor Lesetja Kganyago — just reappointed to a third five-year term — at its helm has a hawk-eyed view on inflation.

The bottom line is that the Fed needs to cut and domestic CPI needs to consistently orbit 4.5% before South African consumers get any relief on their credit repayments. DM