South Africa’s central bank has cautioned that the path to lower inflation has become less certain, citing elevated food prices and volatile energy costs as key factors frustrating progress. Despite inflation falling within the central bank’s target band of 3% to 6% since June 2023, it has consistently hovered above the preferred midpoint of 4.5%, where the bank aims to anchor expectations. In its six-monthly Monetary Policy Review, the South African Reserve Bank expressed concern that the setbacks in disinflation suggest a prolonged and bumpy journey back to the 4.5% midpoint. As a result, the bank anticipates the need to maintain current interest rate levels for a longer period than previously expected. One of the primary pressures on inflation stems from services inflation, which the bank projects will rise sharply to 5% this year compared to 4.2% in 2023. It expects services inflation to remain elevated at 4.7% in 2025. The reserve bank highlighted that certain risks associated with services inflation have materialized, including increasing housing costs and other services components, leading to heightened uncertainty regarding the path of disinflation. The bank emphasized that these risks indicate the ongoing challenge of bringing inflation back to the target sustainably. The reserve bank’s cautious stance aligns with its inaction on interest rates since May 2023, maintaining the benchmark interest rate at a 2009 high of 8.25% for five consecutive meetings. The bank further emphasized that long-term inflation risks remain elevated due to a high public debt burden and increased credit default risks. It stressed the need for fiscal policy to complement monetary policy efforts, highlighting the importance of achieving a more prudent public-debt level to improve domestic economic conditions. The reserve bank also advocated for a move to a single-point inflation target, which it believes would provide a permanently lower inflation profile and reduce borrowing costs compared to the current target band. Governor Lesetja Kganyago has previously indicated that the bank and National Treasury are collaborating on a framework to determine the specific form of a new inflation target.
South Africa’s Inflation Path Uncertain as Food and Energy Costs Linger
