South Africa’s Kganyago Wary of CPI Yet Guarded on Rate Outlook

Lesetja Kganyago. Photo by Aaron Schwartz /Photographer: Aaron Schwartz/Blo

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(Bloomberg) — South Africa’s central bank Governor Lesetja Kganyago said policymakers will “very carefully” monitor incoming data to guide their next rate decision, as the Iran war clouds the inflation outlook and injects fresh uncertainty into the global economy.

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“As ever, we are not going to pre-commit to a path and give up optionality. We cannot offer certainty about our next steps,” Kganyago told an audience on Monday at Rhodes University in the Eastern Cape. “Instead, we want to maximize certainty about where inflation is going – specifically, that it is going back” to the 3% target, he said. 

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Kganyago and his fellow monetary policy committee members left the policy rate at 6.75% at their previous meeting in March to weigh the fallout of the war in Iran.

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Hostilities in the Middle East have sent oil prices surging and effectively closed the Strait of Hormuz, a key artery for about a fifth of global oil and liquefied natural gas flows. Since the war began on Feb. 28, Brent crude has jumped almost 60%, lifting local diesel prices to a record.

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Kganyago acknowledged that while the shock from the Iran war hit as the economy transitioned to a lower inflation target of 3%, policymakers remain committed to steering it back to that level.

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“That is really our most important message: although we cannot do much about higher inflation right now, we are very committed to getting inflation back to 3%, just where we had it before the shock hit,” Kganyago said. “It seemed we were going to complete the disinflation soon, perhaps this year. Now this process will take longer.”

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Inflation edged up to 3.1% in March and is expected to spike in coming months due to higher energy and food prices. 

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“We are experiencing the biggest jump in fuel price inflation in the history of inflation targeting,” Kganyago said. A bigger problem is food prices, he added. “The Middle East conflict has large implications for fertilizers and diesel, both critical components of food supply chains.”

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Persistently higher food inflation alongside the fuel shock would pose serious risks to price growth expectations, he said. 

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“In these conditions, we will be studying the data very carefully, both to assess how these variables are playing out and to see if there is early evidence of underlying inflation starting to move.” the governor said.

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The bank’s quarterly projection model shows inflation peaking at 4.3% for April, while it sees fuel price growth accelerating to 18.3% during the second quarter of this year.

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Kganyago also implied that monitoring other central banks will be crucial, noting “it is hard to sit out a global tightening cycle.”

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