SARB AGM: Power cuts hobble growth

South Africa's Reserve Bank recently held its 103rd annual meeting, marking the first in-person gathering since the Covid-19 pandemic began. The annual general meeting came on the heels of the Reserve Bank's decision to maintain the repo rate earlier in the month. In his address, SARB Governor Lesetja Kganyago highlighted the ongoing challenges facing the South African economy, including high inflation, sluggish growth, and a challenging external environment. To gain a deeper understanding of the potential implications for monetary policy moving forward, CNBC Africa interviewed Izak Odendaal, Investment Strategist at Old Mutual Wealth. Odendaal provided insight into key takeaways from the AGM and shed light on the path ahead for the South African economy. One of the main themes discussed during the interview was the Governor's desire to achieve sustainable lower inflation as part of his legacy. Kganyago emphasized the importance of lowering inflation in the long term, aiming for the 4.5% target to ensure economic stability. Additionally, structural impediments such as infrastructure bottlenecks and concerns over fiscal policy were highlighted as key challenges for the economy. Odendaal underscored the impact of fiscal credibility on market risk premia, particularly noting the influence of the weak rand on inflation and monetary policy. The conversation then turned to the inflation targeting framework in South Africa. While the Reserve Bank operates within the 3% to 6% target range set by the government, Odendaal suggested a shift towards a stronger focus on the 4.5% midpoint as the desired inflation rate. He explained that moving expectations towards a lower inflation target would be beneficial in the long term, despite the potential short-term implications for interest rates. The interview also delved into the effects of interest rate increases on credit demand and household finances. Odendaal highlighted the immediate impact on credit growth and the squeeze on household cash flows due to higher mortgage rates. The moderation in credit demand has already been observed, signaling the effectiveness of monetary policy adjustments. Looking ahead, challenges related to nearshoring and global political dynamics were discussed. The potential reversal of globalization's disinflationary effects and the impact on manufactured goods and services were identified as longer-term concerns for inflation. Despite the uncertainty surrounding these structural shifts, Odendaal acknowledged the potential for global inflation to deviate from the low levels seen in the past decades. While acknowledging the complexity of predicting such trends, he emphasized the need for vigilance and adaptability in the face of evolving economic dynamics. Overall, the conversation highlighted the multifaceted nature of South Africa's economic challenges and opportunities, underscoring the importance of sound monetary and fiscal policies in navigating a complex global landscape.