/News24.com | Reserve Bank warns that Ukraine war poses risk to inflation
News24.com | Reserve Bank warns that Ukraine war poses risk to inflation

News24.com | Reserve Bank warns that Ukraine war poses risk to inflation

 South African Reserve Bank Governor Lesetja Kganyago

South African Reserve Bank Governor Lesetja Kganyago

Gallo Images / Business Day / Freddy Mavunda

South Africa’s central bank warned that mounting price pressures stemmingfrom the war in Ukraine risk de-anchoring inflation expectations as itannounced the first full overhaul of its monetary policy implementation systemin almost a quarter century.

While the South African Reserve Bank officially targets price growthin a band of 3% to 6%, its monetary policy committee prefers to anchorexpectations close to the midpoint of the range. A survey showed inflationassumptions over the next two years increased to 5% in the first quarter, from4.7% in the final three months of 2021, raising the prospect of “moreenduring” second-round effects on prices, it said Tuesday in its bi-annualMonetary Policy Review.

The bank doesn’t respond to short-term price shocks. Instead, itspolicy making seeks to address the wider second-round effects of higher prices,such as on transport and food costs and that could feed into wage setting.

The monetary policy committee raised the bank’s benchmark rate bya cumulative 75 basis points to 4.25% since November to tame rising inflation,unwinding some of 2020’s extraordinary monetary policy stimulus that was aimedat shoring up an economy ravaged by the coronavirus pandemic. Despite thoseincreases, the real interest rate – the difference between the rate of pricegrowth and the key interest rate – “has become more accommodative asinflation has risen faster” and is highly stimulatory, it said.

While the central bank plans to normalise interest rates, in linewith developed and peer economies, its stance “is currently expected toremain accommodative and supportive of the economic recovery,” it said.

At its last monetary policy committee meeting in March, threepanellists voted for a quarter-point increase, with the remaining two preferringa 50 basis-point hike. The vote split was viewed as particularly hawkish bymarkets, especially as the benchmark rate hasn’t been raised by 50 basis pointsat a single meeting in more than six years.

The central bank also said it aims to introduce a new monetarypolicy implementation framework this year, switching to a surplus system fromthe deficit mechanism that’s been in place since 1998.

The change means commercial banks will be allowed to build asurplus of reserves, some of which can be placed at the Reserve Bank and earnthe policy rate – a shift from the current system, whereby the central bankengineers a shortage of reserves and lends the missing funds to commercialbanks at the benchmark interest rate.

New framework

The new framework, which should take about three months totransition to and will follow a pre-announced path, will improve interest-ratecontrol and avoid some of the distortions and expenses associated with thedeficit system, the Reserve Bank said.

It will also come after shortages have now fallen to about R30billion to R35 billion, compared with typical pre-coronavirus deficits of R56billion. Those reduced shortages, coupled with commercial banks borrowing morethan needed to offset the deficit at the Reserve Bank’s Wednesday repoauctions, have led to the interbank market generally ending the day with a “substantialsurplus in contrast with the pre-crisis norm where excess reserves were nearlyzero,” according to the central bank.

The average end-of-day position has been R5.3 billion over thepast six months, up from R161 million in 2019, it said.

Reserve holdings of banks in the new framework will be guided bycaps that prevent lenders from hoarding liquidity and thus help to maintain theinterbank money market, similar to the “tiered floor” system used bythe Reserve Bank of New Zealand and the Norges Bank, the central bank said.

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