SA Reserve Bank interest rates will go up if consumer inflation continues to bite

The South African Reserve Bank (Sarb) could tighten monetary policy this week as inflation continues to head towards the top end of its 3-6 percent target range. Picture: Bongani Shilubane/ African News Agency (ANA)

The South African Reserve Bank (Sarb) could tighten monetary policy this week as inflation continues to head towards the top end of its 3-6 percent target range. Picture: Bongani Shilubane/ African News Agency (ANA)

Published Mar 22, 2022

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THE SOUTH African Reserve Bank (Sarb) could tighten monetary policy this week as inflation continues to head towards the top end of its 3-6 percent target range.

Global producer price and food price inflation continues to surprise higher on fears of supply chain disruption, with the Russian war in Ukraine pushing oil prices to a 14-year high. Global agriculture and other commodity prices have also risen strongly.

Electricity and other administered prices also continue to present short- and medium-term price risks, as Eskom will get a 9.6 percent tariff increase from April 1. it is in these contexts that Sarb’s Monetary Policy Committee (MPC) will meet from today until Thursday.

The MPC meeting occurs in a highly fluid global environment, characterised by heightened uncertainty and intense inflationary pressures.

The MPC’s decision is likely to strike a more hawkish tone after it decided to increase the repurchase rate (repo rate) by 25 basis points to 4 percent, while assessing upwards the risks to the inflation outlook, in its January meeting.

The bank has already revised higher its forecast of headline inflation for this year to 4.9 percent, up from 4.3 percent.

A poll of 18 economists, academics, and property specialists for Finder.com’s “Sarb Repo Rate Forecast Report” last week saw the majority of panellists expecting interest rates to increase by 25 basis points to 4.25 percent.

ETM Analytics’ co-head of financial markets Kieran Stephen Siney said the MPC needed to increase rates to keep in step with what is happening in the rest of the world.

Last week, the US Federal Reserve hiked rates by 0.25 percent for the first time in 4 years, and committed itself to chase inflation over the next 2 years.

Central banks around the world increase the cost of borrowing, interest rates, for commercial banks in a bid to tighten money supply and slow demand for goods, lowering inflation.

“Central banks around the world are hiking as supply cost pressures build, and the Sarb will not want to be out of step with them,” Siney said.

“The surge in commodity prices and rise in administered prices suggest that inflation is likely to breach the central bank’s 3-6 percent inflation target range.”

Heightened uncertainty from the onset of the Russia-Ukraine conflict has also sparked a new bout of inflationary pressure, more and above pressure from the recovery in demand following the pandemic shock.

Oxford Economics Africa economist Jee-A van der Linde said the conflict in Ukraine was impacting interest rates, in addition to inflation.

“Russia’s invasion of Ukraine has precipitated stronger price pressures, which could see the apex bank bring forward expected interest rate hikes,” Van der Linde said.

“However, the heightened uncertainty will also mean that the forward-looking Sarb will be mindful of possible second-round effects, and look through the near-term upward forces on inflation.”

However, 3 panel members including Stellenbosch University’s economics professor Stan du Plessis all believe the rate will increase by 50 basis points this week, due to inflationary pressures.

“The MPC needs to curtail the inflationary pressure that is building locally, in circumstances of rising interest rates internationally,” Du Plessis said.

The majority of panellists expected several rate hikes this year, though the increase would be incremental.

However, the panel forecasts the repo rate will be at 5 percent by the end of 2022, one percentage point higher than the current rate.

FNB economist Koketso Mano however believed the Sarb could increase interest rates well above 5 percent this year, starting with a 50 basis point increase this month.

“We expect the Sarb to continue hiking rates at every remaining meeting this year, with policy rates ending the year at 5.25 percent. Two additional hikes are expected in 2023 and the terminal rate is 5.75 percent,” Mano said.

“Any de-anchoring of inflation expectations from the 4.5 percent midpoint may be hard to reverse – keeping structural inflation higher.

“Seemingly, moving earlier could be more effective and 50 basis points hikes, with pauses later, are not unfathomable.”

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