SARB raises rates to tackle supply shocks, inflation expectations
South African Reserve Bank Governor Lesetja Kganyago announced a rate hike from 6.75 percent to 7 percent. The decision addresses persistent supply shocks affecting food and fuel prices and aims to anchor inflation expectations.
From uncertainty to action
Governor Kganyago noted that initial hopes for a short-lived conflict and quick price normalisation have faded.
The Strait of Hormuz remains largely closed, causing sustained high prices for Gulf products like oil.
Furthermore, the outlook for food prices has deteriorated due to fertiliser shortages and high diesel costs in supply chains, with South African farmers questioning the viability of planting next season.
These overlapping shocks, exacerbated by potential El Niño drought risks, prompted the Monetary Policy Committee (MPC) to raise rates at its most recent meeting.
This move follows a previous decision in March to leave rates unchanged amidst high uncertainty, but the clarity of worsening conditions necessitated action.
The inflation playbook
Kganyago highlighted the challenge of communicating about supply shocks, noting that while monetary policy cannot directly address droughts or oil prices, it must prevent initial shocks from leading to persistent, broad-based inflation.
He referenced the lesson from 2022, where emerging markets that responded timeously to impending trouble fared better than advanced economies that initially adopted 'do-nothing' strategies.
The central bank's role is to stop inflation from becoming self-perpetuating by managing expectations.
This involves distinguishing between first-round effects (direct price increases from a shock) and second-round effects (broader price and wage increases driven by shifting inflation expectations), a distinction that is theoretically clear but difficult to apply in practice due to policy lags and the need for judgment calls.
Credibility's hard price
Distinguishing first- and second-round effects of supply shocks remains a complex, judgment-driven exercise for central bankers.
Yet, anchoring inflation expectations is paramount, even when policy tightening is unpopular and the economy is weak.
This commitment to price stability, often at a political cost, is the true test of a central bank's credibility and the foundation of inflation targeting.