The South African Reserve Bank (SARB) will continue raising interest rates well into 2023 in a bid to stabilise monetary policy and restore price stability amid persistently high inflation.
SARB Governor Lesetja Kganyago said yesterday that domestic inflation outcomes had worsened as higher global food and Brent crude oil prices weighed on prices.
Inflation in South Africa climbed to 7.6% in August, a slight moderation from the 7.8% hit in July, and a full 1.9 percentage points above the inflation outcome of January.
Headline inflation is expected to average 6.5% in 2022, up from 4.5% in 2021, and to remain above the midpoint of the target range of 3 to 6% into 2024.
As inflation and expectations of future inflation increased, SARB’s Monetary Policy Committee (MPC) has raised the repurchase (repo) rate by a cumulative 200 basis points over the past six months, and 275 basis points since November 2021.
This brought the repo rate to 6.25% last month compared to the average rate of 6.64% prevailing in the year prior to the Covid-19 pandemic
However, Kganyago said South Africa’s hiking cycle to date had been much shallower compared to peer emerging markets.
Kganyago said if persistently elevated inflation was not brought under control within a reasonable time frame, a prolonged period of higher interest rates could be expected.
“In that case, the overall economic cost of eventually getting back to lower and stable inflation rates can rise sharply, well beyond short-run costs,” Kganyago said.
“Guiding inflation back towards the target sooner reduces the risk that high inflation gets entrenched.
“Further normalisation may be needed to raise rates to levels that are consistent with a stable and lower inflation rate.”
The SARB yesterday released the October 2022 Monetary Policy Review, a bi-annual report covering domestic and international developments that affect the monetary policy stance.
It projects inflation to revert closer to the midpoint in 2023 on sharp disinflation in food and fuel, but the pace is likely to be mediated by rising core inflation, with risks to the outlook to the upside.
Investec chief economist Annabel Bishop, however, said inflation was on course to average 6.8% for 2022.
Bishop said South Africa had seen its highest inflation figures since 2009 this year, and the rapid upwards pressure on prices had spread to other goods and services as the cost of living had become more expensive on a broader basis
“We continue to expect CPI inflation will average 6.8% year-on-year in South Africa this year, although risks to the upside remain for this forecast, particularly from energy prices, with the Russian/Ukraine war ongoing and Opec+ expected to reduce supply to the oil market,” Bishop said.
“The rapid pace of interest rates hikes, which has been introduced this year to attempt to bring down inflation in key advanced economies and elsewhere, has slowed global growth and increased fears of recession, while oil prices remain historically high.”
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