SA Reserve Bank governor warns about ‘complacency’ setting in while inflation slows

The prospect of interest rate cuts are in the spring air in South Africa, with consumer inflation at 4.6% and the US Federal Reserve widely expected to start trimming in September. Economists generally expect both to start cutting rates from next month.

But SA Reserve Bank Governor Lesetja Kganyago always keeps his cards close to his chest given how markets can react in big ways to incremental changes, and he was typically cautious on Thursday when responding to questions about the inflation trajectory at a lunch with the media in Johannesburg.

“We were here exactly a year ago, inflation hit 4.7% and there was excitement about ‘oh yes now we are going to see this decline’. But the risks materialised at the time and inflation started to tick up. It came down again now,” he said. 

South Africa’s consumer price index slowed significantly in July to 4.6% year on year, a three-year low, from 5.1% in June.

Read more: Relief in sight as annual consumer inflation slows to three-year low of 4.6% in July, rate cut looms

But it did subsequently spike to 6% year on year in December last year and while it has since subsided to below that – so within the SA Reserve Bank’s mandated target of 3% to 6% – the central bank really wants it anchored firmly in the middle of that range. And it got back there only in July and after a brief flirtation in the middle of the range last year.

“Yesterday’s inflation only confirms policy decisions taken 12 months ago,” the governor pointedly noted – a vindication of the SA Reserve Bank’s decision to keep rates elevated.

“What matters for the future is what the outlook for inflation is. Our forecast is that we will be 4.5% in this coming quarter. Some of the months we might even be below 4.5%. But what matters is the next three quarters in the New Year. And at the moment it looks like we will be during 2025 averaging the 4.5% that we are targeting,” the governor said. 

That is a signal that a rate cut is looming sooner rather than later, but don’t expect massive cuts from the SA Reserve Bank’s current repo rate of 8.25% which translates into a prime lending rate of 11.75%.

“Risks abound,” Kganyago cautioned, referring to the recent annual economic shindig in Jackson Hole in the US state of Wyoming. 

“Just coming out of Jackson Hole, the assessment was people feel that we are in this last mile. And the question was ‘a last mile what? We are on a disinflationary path. When you are saying you are on the last mile, are you saying that disinflation is going to stop?” Kganyago said. 

“Or are you saying that we are seeing the back of inflation? Something that comes in my own assessment is I think that complacency could easily set in.”  

Complacency on the inflation front is something the governor could never be accused of. But a rate cut of 25 basis points is probably in the offing though the pace and scale of monetary easing is likely to be gradual. DM