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Sarb to continue ‘aggressively hiking’ rates to maintain SA’s price stability

Published Jun 28, 2022

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The South African Reserve Bank (Sarb) has given the strongest indication yet that it will continue aggressively hiking interest rates in a bid to maintain price stability in the country.

In its annual report yesterday, the Sarb said it was on course to contain consumer price inflation within its target range of 3 to 6 percent this year, in spite of the latest headline inflation rising above expectations.

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This means that the Sarb will have to increase its lending rates further from the current 4.75 percent to drive down inflation.

Inflationary pressures in advanced economies have spurred a number of central banks to commence their monetary policy normalisation cycles.

The Sarb has also not been left unscathed, with its Monetary Policy Committee (MPC) opting for the normalisation of the repurchase rate, raising it by 125 basis points since November, 2021.

According to Statistics South Africa, inflation for May breached the Sarb’s target range and rose to 6.5 percent for the first time since January, 2017 driven by rising fuel and food prices.

However, the Sarb yesterday lowered its forecast of headline inflation for this year after revising it higher to 5.9 percent in May, up from 5.8 percent, primarily due to the higher food and fuel prices.

Sarb governor Lesetja Kganyago said inflation remained within the target range during the period, and was projected to remain there on average over the two-year forecast horizon.

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Kganyago said inflation was expected to rise to 5.5 percent for 2022, before decreasing to 4.4 percent in 2023 and 2024.

“The monetary policy stance has been, and remains supportive of the recovery, with the repurchase rate currently at 4.75 percent,” Kganyago said.

“At the May MPC meeting, the bank’s forecast of headline inflation for this year was revised higher to 5.9 percent, up from 5.8 percent primarily due to the higher food and fuel prices.

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“While food prices will stay high, fuel price inflation should ease in 2023, helping headline inflation to fall to 5.0 percent. Headline inflation of 4.7 percent is now expected in 2024.”

Economists are expecting the Sarb to raise rates further between 50 and 75 basis points in July, and another 25 basis points hike in September.

Investec chief economist Annabel Bishop said higher interest rates, particularly in the US, and high inflation globally had driven global recession fears and risk aversion.

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Bishop said high inflation and weaker global growth was still the most likely characterisation for this year, with the Russian/Ukraine war showing no signs of abating.

“With a lengthy war in the Ukraine of many years expected by Nato, the US will find it hard to collapse its inflation on the impact of food and fuel prices, and will likely either need to live with higher inflation or a substantially weaker jobs market which may necessitate a recession,” she said.

“In South Africa, high inflation aids the run-down of nominal debt, if accompanied by robust nominal inflation-led GDP, with lower fiscal debt and deficits, both actual and projected, positive for the domestic currency.

“However, well above-inflation wage demands seek to eat up the gains,” Bishop said.

On the economic front, Kganyago said South Africa’s growth would continue to moderate as the recovery fades and other constraints, such as load-shedding, prove limiting.

Last month, the bank forecast gross domestic product (GDP) growth at 1.9 percent in 2023 and 2024.

Kganyago said while the economy had benefited from still elevated commodity prices, and the global environment had become less supportive of domestic growth, especially with the ongoing war in Ukraine.

“Some sectors of the economy, such as tourism, transport and construction remain slow to recover, and the considerable loss of jobs and business closures are expected to persist,” he said.

“With the lifting of all pandemic-related restrictions, these sectors are expected to recover gradually.

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