INTERNATIONAL banking group BNP Paribas has warned that consumer prices in South Africa could increase aggressively this year as a result of the war between Russia and Ukraine.
BNP on Friday said South Africa's headline inflation rate could soar up to 6 percent this year, as the intensity of Russian sanctions continue to exert upward pressure on the global economy.
Inflation has been below 6 percent since 2016, when it was driven by a severe drought induced by one of the strongest El Niño events on record, which reduced crop production by nearly 50 percent.
On Friday, BNP revised upwards its average 2022 consumer price inflation (CPI) estimate by 0.8 percentage points, to 6.0 percent, on higher non-core prices exacerbated by the crisis in Ukraine.
It said inflation would climb higher and descend more slowly, impacting growth and consumer spending very strongly.
BNP SA senior economist Jeff Schultz said the geopolitical tension was revealing itself through significantly higher inflation pressures as sanctions were set to disrupt global supply chains further, ramping up global oil and food prices.
Schultz said they expect South Africa to face a sharp, supply-driven spike in its CPI over the coming months as a net importer of fuel and food.
He said higher food and fuel prices for longer could mean more pronounced second-round price pressures in the economy.
“Outside of the ongoing humanitarian crisis in Ukraine, heightened geopolitical tensions and sanctions on Russia are having severe and meaningful implications for the global economy,” he said.
“Headline CPI now looks likely to breach [the] SA Reserve Bank’s upper 6 percent target band from April, and only slow back to within the upper end of the band by the fourth quarter.
“More problematic inflation will of course also have to be weighed against an increasingly hazy global and domestic growth outlook.”
Russia’s invasion of Ukraine and the subsequent sanctions have upended global trade, shooting up commodities prices – such as oil and precious metals – to fresh record levels.
Fuel prices in South Africa reached an all-time high this month with a R1.46 increase, rising above R21 a litre for the first time ever.
Agricultural produce such as grains, wheat and sunflower oil have also experienced escalating prices on fears of disruptions to supply chains in war-torn Ukraine.
Over the past five years, South Africa sourced around 30 percent on average of its wheat imports from Russia and Ukraine.
“Higher oil and grain prices would also push up local inflation and subsequently place pressure on the already burdened SA consumers,” said Casey Delport, an investment analyst at Anchor Capital.
“More generally speaking, even though the direct trade and investment linkages are small, South Africa is still likely to be significantly affected.”
In January, the Reserve Bank revised higher its headline inflation forecast for this year – still modest at 4.9 percent, from 4.3 percent.
It said inflation would remain towards the higher band of its 3-6 percent target range as risks were assessed to the upside, pushed up by rising administered prices and a faster normalisation of global policy rates.
In light of inflationary pressure, the Reserve Bank is expected to continue normalising interest rates with another 25 basis points increase to 4.25 percent this month to keep inflation expectations well anchored.
BUSINESS REPORT ONLINE