The SA Reserve Bank is likely to hold off on hiking interest rates in 2021 despite consumer inflation reaching a 30-month high in May. Most economists have said the spike in the gauge was due to prices normalising from unusually low levels in 2020.
That’s despite hawkish comments from Federal Reserve chair Jerome Powell last week that many interpreted as a signal that US rates may rise sooner than previously expected. Powell's comments prompted a sell-off in the rand that saw it retrace from stronger than R13.50/$ last week to about R14.18/$ on Wednesday.
Yet even after Stats SA said on Wednesday that consumer price inflation quickened to an annual 5.2% in May 2021, up from 4.4% in April, economists said it wouldn’t be enough for the Reserve Bank to begin hiking rates in 2021. When measured month on month, the consumer price index (CPI) increased just 0.1% in May.
“We continue to expect that rates will only be hiked in the second half of 2022,” said Siobhan Redford, an economist at RMB. “We still expect that [the May inflation] print will be the peak for 2021.”
The main contributors to the May 2021 consumer price inflation rate were food and nonalcoholic beverages, housing and utilities, transport and miscellaneous goods and services. The acceleration in price growth was partly due to a so-called “base effect,” whereby prices correct back towards more usual levels after a prior period of decline.
Stats SA said petrol prices were 41.8% higher in May 2021 compared with the same month in 2020, while diesel was 27% more expensive. That came after oil prices plummeted early in 2020 as the effects of the worldwide Covid-19 pandemic crushed demand for fuel due to widespread lockdowns that confined consumers to their homes for months on end, across the globe.
“The main reason for this high number was the low base established early in 2020 due to the steep drop in fuel prices,” said Johann van Tonder, an economist at Momentum Investments. “That will work itself out of the system in the second half of 2021 and into the first quarter of 2022.”
Though the 5.2% CPI reading for May 2021 was the first time the rate had risen above the midpoint of the Reserve Bank’s 3%-6% target range since February 2020, economists were still not convinced that would translate into higher interest rates this year.
“The good news is that monthly CPI is very muted so we don't expect a hike in interest rates in 2021,” said van Tonder.
Momentum Investments said in a separate client note that consumer inflation probably peaked in May, and should begin to subside in the second half of 2021 as price trends continued to normalise. Though Momentum expects that some members of the Reserve Bank's monetary policy committee (MPC) may start turning hawkish, prompting them to vote for a 25-basis point rate increase in one or more of the next three MPC meetings in 2021, it still expects the first increase in rates to occur only in the first half of 2022.
Even so, HSBC said in a client note on Tuesday that it expected the Bank to hike rates by 25 basis points in September and a cumulative 100 basis points in 2022. That comes after policymakers lowered their benchmark interest rate 300 basis points in 2020, with 275 basis points of cuts coming since the onset of the pandemic, in an effort to bolster the economy.
The impact of higher fuel and food prices on the headline CPI reading were underscored by the far more muted core inflation reading of just 3.1% in May. Core inflation excludes food and nonalcoholic beverages as well as fuel and energy.
“Our forecast is that this is the peak in inflation and it will begin to moderate from here,” said Isaah Mhlanga, chief economist at Alexander Forbes Investments. “I only expect rate hikes in 2022, even with the Fed becoming more hawkish.”
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