On the eve of the Reserve Bank’s decision on interest rates, data signalled that the spike in price hikes that pushed the inflation rate to a 30-month high in May may have been a blip.
That may give policymakers scope to support an economy that has suffered another blow from a week of chaos and looting by keeping interest rates at their lowest level in about five decades even as food and transport continue to put moderate pressure on prices.
The annual rate of change in consumer prices eased to 4.9% in June, down from 5.2% the previous month, Stats SA said on Wednesday. On a month-on-month basis, the consumer price index (CPI) increased 0.2% in June. The Bank has a target range of 3%-6%.
After their meeting in May, policymakers said that they expected inflation to average 4.2% in 2021, before climbing to 4.4% the next year and 4.5% in 2023. Analysts will be on the lookout for comments from the Bank on whether recent events, which caused supply disruptions that may prompt prices of some commodities to rise, will have a lasting impact for its assumptions on GDP growth and inflation.
“With inflation hovering around the midpoint of the Reserve Bank’s target band, a rate hike will be a difficult sell in the context of a weak domestic economy with limited demand-side price pressure,” said Nicky Weimar, chief economist at Nedbank. “Though we do see upside risks to the inflation outlook in coming months ... this will probably be temporary.”
Policymakers lowered the repo rate by 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, which eventually experienced a 7% drop in GDP, the biggest in a century.
Weimar said the Bank is likely to hold off on raising rates for the rest of 2021 due to the fragility of the domestic eco-nomy in the wake of Covid-19, a factor that has only been worsened by the devastating unrest in KwaZulu-Natal and Gauteng.
“We anticipate the hiking cycle to begin in early 2022,” she said. “But we can’t rely on the rand to contain imported inflation in the context of a Federal Reserve that may begin tapering,” she said.
The rand is suffering a bout of weakness after the unrest, while global inflation concerns are mounting. Rising US price pressures, in particular, are fuelling market speculation that the Federal Reserve may raise interest rates sooner than previously anticipated and begin winding down its quantitative easing programme in a process commonly referred to as tapering.
Raising rates in the US will reduce the yield appeal of holding SA assets.
The rand — at one stage one of the best-performing emerging-market currencies against the dollar this year — has weakened from about R14.28/$ before the unrest to as weak as R14.78/$ on July 14. It has since recovered somewhat and was 0.36% firmer at R14.55/$ at 6.30pm on Wednesday. It is about 1% firmer so far in 2021.
The main contributors to SA’s 4.9% annual inflation rate for June were food and nonalcoholic beverages, housing and utilities, and transport.
Prices of food and nonalcoholic beverages accelerated 6.7% year on year and contributed 1.2 percentage points to the total CPI annual rate. Transport inflation advanced by 12.3% year on year, and contributed 1.7 percentage points.
Housing and utilities prices quickened 2.6% year on year, and contributed 0.6 of a percentage point.
“Food inflation should remain relatively elevated, and risks are that a disruption to processing and distribution networks after the civil unrest could place upward pressure on non-essential food products, but the extent is not yet clear,” said FNB economist Koketso Mano.
“Still, our view is that overall demand remains muted, especially with the number of jobs now at risk as well as low consumer confidence,” Mano said.
The Bank ends its monetary policy committee meeting on Thursday.
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