Repo rate may rise, too
INFLATION EXPECTED TO AVERAGE 6.9%, COMPARED TO 4.5% IN 2021 Interest may peak higher than current forecast of 7.5%, says research group.
The inflation increased again yesterday and repo rate will probably follow suit today with an increase of 75 basis points on the eve of Black Friday.
Economic research group Oxford Economics Africa said headline inflation came in slightly hotter than expected at 7.6% in October compared to October 2021, basically dousing expectations of a 50 basis points rate increase, strengthening the group’s forecast for a 75 basis points hike.
While the group expected price inflation to remain sticky at elevated levels over the coming months, inflation was expected to average 6.9% in 2022, compared to last year’s 4.5%. The new inflation rate was up slightly from the 7.5% in September.
The main contributors to the annual inflation rate were food and nonalcoholic beverages (+12.0% and contributing 2.1 percentage points), housing and utilities (+4.3% and contributing 1.1 ppt), transport (+17.1% and contributing 2.4 ppt) and miscellaneous goods and services (+4.8% and contributing 0.7 ppt).
Miscellaneous goods and the increase in the latter subindex, which comprises health insurance, was likely due to higher medical aid contributions.
Core inflation, which excludes food, nonalcoholic beverages, fuel and energy, increased by 0.3 ppt to reach 5.0% compared to October 2021. “Core prices are now at their highest level since February 2017, but the latest data also shows that goods inflation moderated from 10.7% to 10.5%, while
annual services inflation accelerated by 0.3 ppt to reach 4.6% most recently.
“While we continue to anticipate disinflationary pressures, price inflation will remain at elevated levels. The monetary policy committee of the SA Reserve Bank has made it clear it will need to see further evidence of slowing inflation before easing monetary policy,” the group said.
“We forecast a 75 basis points increase in the fourth quarter, followed by an additional 50 basis points increase in the first quarter of 2023, which should see the conclusion of the current hiking cycle.”
The group said depending on what happened to domestic inflation over the coming months, what the US Federal Reserve decided in December and how the
rand reacted, it was possible the repo rate might peak even higher than its current forecast of 7.5%.
“Overall, inflation is expected to average 6.9% this year, up slightly from our previous forecast of 6.8%, compared to 4.5% in 2021. Next year, South Africa’s inflation rate is forecast to be 6.0%.”
Luigi Marinus of PPS Investments said inflation averaged 6.8% for the calendar year 2022 to date, which was above the top end of the target band, while monthon-month inflation increased by 0.4%, compared to 0.1% increase of previous month.
“Transport was again the largest contributor, contributing 2.4% of the 7.6% increase over the year. Although it is high, it has been declining as a proportion of total inflation as the global oil price moderated.”
On the other hand, he said, the contribution of food and nonalcoholic beverages has been increasing, contributing 2.1% to inflation. Other large contributors are housing and utilities (1.1%) and miscellaneous goods and services (0.7%). All 11 inflation groups saw a price increase year-on-year.
“Food and public transport, important inflation considerations for many SA consumers, increased by 12.3% and 23.3% respectively, in part as a result of the secondary effect of the 30.1% increase in fuel prices.”
The prime lending rate is 2.5% higher than a year ago. Adriaan Pask, at PSG Wealth, said higher inflation expectations and depreciating currencies reinforced the need for central banks to hike interest rates.