CPI forecast darkens amid fresh rates hike fears

SA’S fourth-largest bank has a bleak forecast for the local economy after revising its projection for consumer inflation and interest rates for the rest of the year.

SA’S consumer price index (CPI) rose to 6.5% in May, breaching the Reserve Bank’s upper limit of 6% amid relentless increases in food and petrol prices. This is the highest the rate has been since January 2017, when it hit 6.6%.

Nedbank’s economic unit on Tuesday increased its forecast for average CPI from 4.9% to 6.5% this year, which will “hurt discretionary income and persuade households to be more cautious about spending on non-essential goods and services”.

It sees the Bank hiking the repo rate by a further 100 basis points between now and the end of the year.

Nedbank expects SA’S economy to grow 2.2% this year on better-than-expected results in the first three months of the year as SA’S real GDP grew by a seasonally adjusted 1.9%, up from 1.4% in the last three months of 2021.

This was partly because consumers and the government spent more.

Nedbank sees domestic demand being the key driver of economic growth, flanked by growing consumer spending and firmer fixed investment.

But it warned the potential risks of weaker global demand, disruptions from the devastating floods in Kwazulu-natal in April, the ongoing power problems as well as load-shedding at Eskom, rising inflation and higher interest rates could knock economic growth off balance. Meanwhile, the global economy suffered in the first half of this year because of surging energy, food and other commodity prices as Russia’s invasion of Ukraine continues to pile pressure on global inflation.

This led to the US and other major central banks hiking interest rates more aggressively than previously expected and the World Bank cutting its global growth forecast from 4.1% to 2.9%.

“Given slowing growth and higher inflation, global risk appetites are likely to remain subdued and markets volatile, unsettled by growing fears of stagflation and the increased threat of recession,” Nedbank said.

Stagflation refers to an environment in which growth is low while inflation high.