Figures released on Wednesday show that for the second month in a row inflation has breached the upper limits of the SARB target band of 3% to 6%. And, also for the second month in row, has accelerated, going from 5.9% in August to 6.1% in September and finally to 6.4% in October. This result is the highest inflation has been since the 7% recorded in February this year.
The SARB has committed itself to maintaining its inflationary target and Governor Kganyago has routinely mentioned the protection of the poor from large price increases. It can only really do this by increasing the interest rate, at least that would be the case under ideal circumstances. The circumstances are far from ideal.
The inflationary pressure that South Africa is facing (and has faced since 2013) is resistant to monetary policy manipulations and is dependant on factors way out of the SARB’s ability to control. The main factors are currently Rand weakness (we import a lot and pay in Dollars, Pounds and Euros) and the worst drought in a century. These have worked together to keep pushes prices higher despite negligible economic growth that would otherwise keep this kind of inflation in check.
Raising the interest rate now could also really hurt the economy as it would increase the cost of loans, credit cards and accounts just as we enter the busiest retail season of the year. Shops who rely on credit to acquire stock would find their costs increasing and consumers may think twice about purchases as they are, generally speaking, already under an enormous debt burden and have shown signs of moderating their spending.
I believe that the rate will remain unchanged tomorrow. But if inflation persists in breaching the 6% upper target range in November and December it will make a increase at the next meeting in January highly likely. And if South Africa receives two ratings downgrades to Junk Status in December the SARB will certainly be raising the interest rate, it might even take the extraordinary measure of having an unscheduled or early meeting before the end of the year.