RMB chief economist Rudolf Gouws said during a seminar on Tuesday evening that the challenge in South Africa now is to prevent stagflation, and that the central bank will undertake a healthy debate come 12 June on the impact of higher rates on growth.

Gouws says the "ice" variable is the slower growth the economy is bound to have due to the higher rates environment.

"We had 25 very grim years from the 1970s. Our inflation is now the highest of just about all emerging markets and our growth rate is falling, but there is a danger of a return to stagflation and this is why we should support what the South African Reserve Bank (SARB) has done to now and the fiscal surplus in order to avoid this," he said.

"Inflation is going to fall, but the problem at the moment is inflation is substantially higher than inflation abroad, and we've got current and capital account vulnerabilities," said Gouws.

He feels at the moment another rate hike is probably on the cards, with a lot of this hinging on the Eskom price news come 6 June.

However, Gouws also says there will probably be active debate in the Monetary Policy Committee between the "hawks" and the "doves".

He notes that the "doves" in the MPC will be focusing on the impact of higher rates on growth and the fact that the country is now entering a downward growth phase.

The writing is on the wall

Unlike some other analysts who feel the writing is on the wall as to probably two more rate hikes, Gouws indicates the MPC will also debate not raising rates.

"The SARB has a flexible approach and do not have blinkers on and will 'gradually but relentlessly' push inflation to within target range," he said.

It is now just which approach — gradual or relentless.

"I think they will raise again — but I don't hold that view with great conviction," said Gouws.

"They will look at the other variable — the 'ice' — which is the slower growth we're bound to have," he said.

Gouws said that next year real rates should have risen and growth slowed and then room may have arisen for interest rates to be cut at that point, “but any number of things could go wrong with this view".

He highlighted that increased wage settlements due to higher inflation does give the SARB something to be nervous about.

"The poor are also hit by this," he adds.

Difficult spot

He feels Mboweni is in a "difficult spot", but that almost all central banks are now faced with a similar predicament.

He noted that if they allow inflation to run away then there are stagflation concerns; but if they try and "kill" it, then recession enters the equation.

However, he also points out that South Africa has an additional problem — it is running this huge current account deficit.

He says in the past when interest rates were cut, there was a surplus or small deficit. He also notes with concern the flipside that foreign liabilities must now increasingly be serviced with dividends and interest.

"If the global economy slows we have a problem as commodities come off and they won't buy into SA companies and then there is the domestic politics and xenophobia, among other things," he adds.

"I'm not a doom monger, but we need to think hard whether we can run deficits of this order that are funded by foreign capital," concludes Gouws.

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