The Reserve Bank’s load shedding nightmare
Reserve Bank governor Lesetja Kganyago says that load shedding is proving to be a nightmare for South Africa’s monetary policy as its impact on the country’s economy is becoming more pronounced.
The big problem is that it is incredibly difficult to forecast.
On Thursday (30 March), the governor announced that the central bank would hike rates by 50 basis points, moving against market expectations of 25 basis points. The key reason for the move was a persistent high-inflation environment in the country, amid incredibly low economic growth.
In his announcement, Kganyago pointed to load shedding being a major culprit, cutting two percentage points from growth prospects for 2023 while also driving up prices for all sectors – increasing the cost to do business and adding pressure to households.
This has contributed to inflation sticking at the higher end, with the bank revising its forecast for 2023 to an average of 6.0%, and expecting that headline inflation with only reliably fall back into the target range (3%-6%) in the fourth quarter of 2024.
While many economists anticipated Thursday’s hike to be the final in the current cycle, the Reserve Bank’s shaky view of the years ahead has put this in question.
When asked how close South Africa is to the top of the rate cycle, Kganyago had no definitive answer.
“We have been taking stabs at tackling inflation, and today we took another stab to do it,” he said. “If we only knew the top, we would be able to tell you how far we are from the top.”
Kganyago said the problem is that there are so many moving parts in determining rates: foreign interest rates, foreign inflation imported into the economy, South Africa’s own idiosyncrasies with its own inflation, volatility in financial markets and financial instability in the regional banks in the US.
“There are so many moving parts at the same time that we have to make policy on the best judgement given the best information we have,” he said.
“Adding to the normal idiosyncrasies that we deal with – whether it is wages, rising electricity prices, rising fuel, rising food prices – add to that something we hadn’t thought about for a long time, load shedding is impacting on growth.”
With load shedding causing havoc in the economy, Kganyago said the SARB has to try and determine how much load shedding is affecting inflation. He said that the central bank has only recently tried to quantify this, and it has proved challenging.
“We estimate that load shedding could have easily added 0.5% to overall inflation,” he said.
He stressed that it’s very early days in calculating this, and the issue has its own set of moving parts to track.
“What is the intensity of load shedding? What is the stage of load shedding? How many days will it be implemented for? It is a nightmare trying to forecast what this will be in the future,” he said.
The governor said that the 0.5% figure is, at the very best, an “informed guesstimate”.
Speaking on the SARB’s decision to hike rates while global banks, like the US Fed, have signalled a slowdown or pause, deputy governor Rashad Cassim said that the SARB’s decisions are not that straightforward.
When looking at forward movements in rates, the bank looks at where the source of inflation is coming from, he said. If global banks start hitting pause on rates, and this, in turn, leads to eased inflationary pressure from imports – which South Africa depends on – that will certainly factor into the equation.
It makes it easier for South Africa to ease on monetary tightening policies, Cassim said, but it’s not the be-all and end-all, as local conditions also come into play.
For instance, if inflation continues to be sourced from domestic pressures – such as load shedding – then the SARB won’t necessarily follow the global trend.
“It’s not a straightforward thing – at the end of the day, it’s about what drives inflation and how much of that is coming from global or domestic mechanisms,” he said.
Read: Reserve Bank surprises by hiking rates by 50 basis points
