Just as South Africans thought inflation was under control, the beast has reared its head again as Consumer Price Index (CPI) rose from 3 % to 3,5 % from a year ago in July to reach the highest level in 10 months.

This follows last month’s Monetary Policy Commitee (MPC) meeting, where Reserve Bank Governor Lesetja Kganyago suggested that the bank would use the lower end of the inflation target of 3% to target inflation.

 A year-and-a-half ago, the Bank opted to use the mid point of the target range, or 4,5%, to target inflation. The latest move to target 3% prompted Finance Minister Enoch Godongwana to assert the National Treasury’s role as custodians of the inflation targeting policy, with the Reserve Bank as implementers.

Releasing inflation figures on Wednesday, Statistic South Africa stated that household’s food budgets were under pressure.

“Annual inflation for food & non-alcoholic beverages continued to rise, accelerating to 5,7% from 5,1% in June.” the statistical agency said, noting that meat, vegetables and ‘other food’ fueled the uptick.

“Meat, specifically beef, remains the main driver,” Stats SA said, noting that beef prices had risen, on average, by 28,8% over the past 12 months and by 7,6% between June and July.

This raises the question of how the Bank should respond should inflation inch upwards. A Reserve Bank’s typical response in such a situation, especially one with a predominantly hawkish MPC like Kganyago’s one, would be to raise interest rates.    

Nedbank points out that the Bank provided one set of forecasts after it had released numbers under the 4.5% inflation target’ scenario and the 3% inflation target scenario at the May MPC meeting.

Then at the July meeting, under the 3% scenario, it shows inflation remaining well contained over the forecast horizon to 2027, while risks to the outlook are still assessed as “balanced.”  

The Bank says under the 3% target the average inflation forecast for 2025 was unchanged at 3.3%, while CPI averages 3.3% in 2026 and 3% in 2027. In the previous forecasts under the 4.5% scenario, CPI averaged 4.2% in 2026 and 4.4% in 2027.  The hope is that the July increase does not move us to the 4,5% scenario.

With the 4.5% inflation target, the Reserve Bank Quarterly Projection Model, which is a non-prescriptive guide for how rates are likely to move, projects the repo rate bottoming out at 7%, meaning there is no room for further cuts. However, at the lower target of 3%, the QPM predicts five more rate cuts over the three years to 2027.

South Africans can only hope that even if inflation inches higher, Kganyago should, for once, use his instinct and empathy for struggling consumers and look to cut rates, even if it is less than five times over the medium term.

The reality is that while interest rate can influence inflation by moderating the demand for money in the economy, the ultimate container of inflation is achieving efficiency gains through the successful implementation of the contemplated economic reforms in energy, water, logistics and telecommunications, and that, as Kganyago knows, is not within the Reserve Bank’s control.

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The government has welcomed the South African Reserve Bank’s decision to cut the repo rate by 25 basis points to 7%.

It said on Thursday the reduction provided much-needed relief for South African households as many of them continued to face financial pressure due to the rising cost of living.

“The rate cut is expected to ease the burden on consumers by lowering the cost of borrowing, while also creating conditions more conducive to stimulating investment, supporting businesses and driving economic activity,” it said in a statement.

SARB Governor Lesetja Kganyago told reporters earlier in the day that the Monetary Policy Committee’s decision was unanimous. The rate cuts take effect on 1 August.

On inflation targeting, he said that over the past few months, the prospect of a lower inflation target has bolstered the rand and lowered long-term borrowing costs.

“It is important to sustain this progress, and to minimise uncertainty about the longer-term objectives of monetary policy.

“Therefore, the MPC now prefers inflation to settle at 3%. In line with this, we have decided to aim for the bottom of our inflation target range, of 3%-6%,” Kganyago said.

The government said the decision reaffirmed the soundness of South Africa’s monetary policy framework and the importance of coordinated efforts to support inclusive growth.

It said it continued to implement structural reforms and improve the ease of doing business to unlock the full potential of the economy and create jobs. 

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South African Reserve Bank Governor Lesetja Kganyago said on Wednesday that an “African agenda” including climate change and cross-border payment systems was still due to be discussed by G20 finance chiefs amid fears that tariffs would overshadow the gathering.

U.S. Treasury Secretary Scott Bessent skipped the gathering in Durban, marking his second consecutive absence from G20 finance meetings and raising questions about its ability to tackle pressing global challenges.

President Cyril Ramaphosa has sought to leverage Africa’s first G20 presidency to promote the African agenda, which also included topics such as the high cost of capital.

“The African issues have been elevated, all of us are talking about those,” Kganyago told Reuters as discussions were ongoing between deputies and other officials, before the two-day meeting gets officially under way on Thursday.

Kganyago emphasized the push for a coordinated African payments system to facilitate trade across the continent, a move that could face scrutiny from U.S. President Donald Trump.

Trump has threatened tariffs on BRICS nations for promoting “anti-American” policies, including advocating for payments in local currencies instead of relying on the dollar system.

“As African central banks, we have decided that we are going to enable the movement of payments across borders,” Kganyago said. “We are doing it not to bypass anybody, we are doing it because it will facilitate trade on our continent.”

The G20, initially formed to address global economic crises, has evolved into a key platform for policy coordination. However, Trump’s baseline 10% tariff on all U.S. imports, along with punitive rates targeting specific countries and products, has created significant policy uncertainty.

And while delegates said tariffs were the biggest theme affecting the global economy, Kganyago said G20 members would not develop a coordinated response to the threats.

He instead highlighted the importance of individual countries tailoring their strategies to suit their economies, like during the COVID pandemic.

Michael Kaplan, acting undersecretary for international affairs, will represent the department at the meeting.

Reuters

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South Africa’s inflation rose marginally in April due to higher food prices but remained below the central bank’s target range, statistics agency data showed on Wednesday.

Headline consumer inflation stood at 2.8% year-on-year last month compared with 2.7% in March, while in month-on-month terms, inflation was at 0.3% in April from 0.4% in March.

Economists polled by Reuters had forecast annual inflation would remain steady at 2.7%, below the central bank’s 3% to 6% target range.

Deputy Finance Minister David Masondo said last week that a new inflation target could be announced soon, leading to speculation that it could feature in Wednesday’s budget presentation.

South African Reserve Bank Governor Lesetja Kganyago has for years stressed his preference for a lower inflation target, saying it is needed to make the economy more competitive.

But Finance Minister Enoch Godongwana, who would need to sign off on a lower target, has been reluctant, citing inflationary risks from pervasive poverty and high unemployment.

The prospect of a lower inflation target has lifted the rand, with economists saying a lower target would reduce the likelihood of further interest rate cuts.

“If the Treasury announces a lower inflation target as part of the budget later today, it’s likely that the SARB will stay on the sidelines for some time,” said Jason Tuvey, deputy chief emerging markets economist at Capital Economics.

The next monetary policy announcement by the central bank is scheduled for May 29.

It kept its main lending rate unchanged in March after three consecutive cuts, citing risks from U.S. President Donald Trump’s global trade war and local budget disagreements.

Annual inflation for food and non-alcoholic beverages increased to 4.0% in April, the highest annual rate since September last year, Statistics South Africa said.

Reuters

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