Price rises leave door open for rate hike
SA’s headline inflation slowed more than expected in April but core prices remained sticky, leaving the door open for another 50 basis point hike in interest rates when the Reserve Bank ends its monetary policy committee (MPC) meeting on Thursday.
The Bank, which began the tightening cycle in November 2021, has been looking for signs that its actions are having an impact on inflation. But a recent blowout in the rand-dollar exchange rate raised worries about its impact on prices of imported goods such as fuel.
While the headline inflation rate, as measured by the consumer price index (CPI), slowed to an 11-month low of 6.8% in April on an annual basis, core inflation rose 5.3%, from 5.2% in March.
Core inflation strips out volatile food and energy and better reflects underlying price pressures.
STRAIN
Analysts polled by Reuters expect the Bank to tighten policy by 25 basis points to 8% but financial markets have priced in a larger move, which will put further strain on households with mortgage debt but will be positive for fixed investments.
The erratic and unreliable electricity supply, which increases the cost of doing business in the country, poses a greater upside risk to inflation along with a weaker rand.
“A continuation of the hiking cycle would showcase the MPC’s efforts to uphold their credibility in guiding inflation to target, especially in a time when global inflation remains elevated,” FNB economist Koketso Mano said in a note.
“It will also show their aim at avoiding under-tightening, which would be harder to reverse and will have more adverse implications for the economy when inflation expectations remain elevated, and policy needs to be much tighter than the current trajectory.”
Unlike its peers in the developed markets in particular, the Bank was proactive in managing the anticipated price pressures by adjusting its policy as far back as November 2021.
To date, it has hiked by 425 basis points.
In March, the MPC surprised
with a narrow three-two vote split, hiking the repo rate by 50 basis points instead of the widely expected 25.
The decision at the time strengthened the value of the rand before subsequently losing ground amid deepening power blackouts and more recently because of the negative sentiment flowing from the diplomatic row between SA and the US over the Ukraine war.
The rand traded at R19.20/$ on Wednesday afternoon, compared with R17.81/$ during the last MPC meeting on March 30.
Nedbank economists said their base-case scenario was for a 25 basis points hike in policy on Thursday, though there was a chance of 50 basis points given the weaker currency, which could lead the Bank to revise higher its inflation forecast.
“We believe that [Thursday’s] hike will be the last in the current cycle and will be followed with steady rates for the remainder of the year.
“The easing cycle is likely to begin in the first quarter of 2024,” they said in a note.
The inflation trajectory in the developed markets is still higher relative to recent history and is yet to return to target ranges but is well below the peak reached in the second half of 2022.
The global environment has had an influence on SA inflation dynamics through the randdollar exchange as the US Federal Reserve normalised its policy rate at a faster rate over the past 14 months or so to rein in inflation after initially thinking that it was transitory.
Financial markets are now betting that the Fed might hit a pause button or even ease policy later in 2023, a scenario that gives the domestic central bank some breathing space.