[Opinion] Why Kganyago’s stingy rate cut was exactly right

Consistently higher administered prices (to say nothing of another possible Eskom tariff hike) and slow structural reforms (where the industries of electricity and transport continue to be dominated – and the terms of competition influenced by – state-owned companies), combined to impel last week’s stingy 25 basis point (bp) rate cut. 

Heavily indebted consumers and businesses would have expected more, especially given that annual consumer price inflation reached its lowest point in four years (2.8%) in October, from 3.8% in September.  

The October print is the fifth straight month of inflation decline, and represents the lowest point since June 2020 (2.2%). That is, incidentally, only the second time in the past 50 years that inflation has been as low; the last time was 2004. 

However, for all the positive signs on the inflation front, the country’s growth prospects remain depressed (a serious risk for the future of the government of national unity). The South African Reserve Bank (SARB), for example, forecasts 1.1% GDP growth in 2024, 1.7% in 2025, and all of 1.8% in 2026. 

So what would infinitely help the SARB’s monetary policy work are faster structural reforms and a pro-growth policy. 

SARB governor Lesetja Kganyago said as much in the meeting when the rate decision was announced: “The medium-term outlook is highly uncertain, with material upside risks. These include higher prices for food, electricity and water, as well as insurance premiums and wage settlements.” 

Wage settlements is an especially key issue here, because the SARB has to manage salary expectations. It appears that the Bank now has a lower fixed inflation target of 3% (even though it won’t explicitly say so yet). If a central bank cuts slower, even while inflation data is lower, it helps to manage salary demands, particularly from public sector workers. This is our reality check, given the pressures from the public sector wage bill and the impact on South Africa’s debt-to-GDP ratio, where 22c of every rand is now consumed by servicing our debts. 

The Trump effect 

But, in addition to our own growth constraints, and the government’s drivers of higher production and manufacturing costs, which result in higher inflation from the supply side, we have the dampening effect of global trade and investment uncertainty pervading markets following the election of Donald Trump as the next US president. 

The risks to global trade are substantial, with inflationary consequences emerging if the worst-case scenario materialises. With the possibility that trade tensions and sticky processes will increase prices and costs around the globe (on the back of a more protectionist Trump administration in the US), the SARB’s cautious stance is warranted. Should Trump’s policies spur the US dollar to greater heights, emerging-market currencies such as the rand will experience relatively lower inflows. 

That’s already evident: over the past two weeks the rand has weakened against the dollar. South Africa is especially exposed to imported inflation, but when global trade is more stressed and it becomes more costly to move goods and components, or the dollar strengthens and the rand is weak because of domestic structural and policy issues, it becomes even more vulnerable. In that scenario, the consequence for consumers is higher prices.  

Whether the rand strengthens in this global trade scenario is not dependent on the Trump administration or on the SARB – it falls to the various individuals, departments and workstreams that constitute the unity government. The SARB can use the tools at its disposal on the monetary policy side of matters to manage the money supply. When a central bank acts with predictability and communicates as clearly as possible, its credibility (and in turn, the credibility of that country’s financial sector, banks and currency) is buoyed. Once lost, such credibility is very difficult, if indeed possible, to win back again.  

A 50bp or 75bp cut would no doubt have provided another shot in the arm for consumer spending. Unfortunately, it would manifest as an economic sugar rush – giving the impression of economic activity, but, in reality, no more than short-term consumption. And absent South Africa getting the basics right, such a cut would not, and cannot on its own terms, produce higher growth rates. To achieve higher growth rates, higher levels of fixed capital formation and infrastructure investment are needed; this will follow from structural reforms, the strengthening of property rights, and the creation of a more pro-business regulatory environment.  

Article originally appeared here.