All eyes will be on Stats SA’s October inflation number due this week as well as Reserve Bank governor Lesetja Kganyago, who will meet for three days with his monetary policy committee to decide on whether to raise interest rates from record lows amid accelerating global price pressures.
The October consumer price index (CPI), which the Bank tries to keep within a band of 3%-6% using interest rates as its main policy tool, is due for publication on Wednesday. Economists expect consumer inflation to stay flat at an annual 5% in October, unchanged from the previous month, according to the median estimate of 16 analysts surveyed by Bloomberg.
A better-than-expected inflation reading will increase the likelihood that the Bank will keep rates on hold, while a worse-than-expected CPI print is likely to add pressure on policymakers to hike rates. This comes against a backdrop of rapidly building global inflationary pressures that are prompting traders to bet on a drastic spike in oil prices due to supply constraints. Locally, a rand trading above R15/$ is causing concern about higher import costs.
The Bank’s monetary policy committee will meet from November 16 to 18 to decide on whether to hold the repurchase rate at a more than a five-decade low of 3.5% or whether to tighten borrowing costs in a pre-emptive move to curb price pressures. Those in favour of keeping rates lower for longer argue it is not SA consumers who are stoking inflation, which is largely a symptom of ultra-loose monetary policy by developed nation central banks such as the US Federal Reserve, higher commodity prices and supply chain bottlenecks in the wake of the Covid-19 pandemic.
Annual retail sales data due for publication on Wednesday is expected to show a third consecutive monthly contraction in September, shrinking 0.1%, according to the median estimate of six analysts surveyed by Bloomberg. That comes after retail sales shrank by 1.2% in July and 1.3% in August.
“Consumers have not yet recovered fully from the effects of the pandemic,” said Lara Hodes, an economist at Investec. “Consumer confidence remains subdued, especially pertaining to the economic outlook.”
The weak domestic economy is probably why the Bank is expected to keep its benchmark rate unchanged at 3.5% when it announces its decision on Thursday, according to the median estimate of 17 analysts polled by Bloomberg. Nevertheless, eight of the analysts surveyed expect the Bank to raise the repo rate by 25 basis points.
“SA risks further rand depreciation if the Reserve Bank does not begin hiking interest rates in line with a number of other emerging market economies, in turn risking further upwards pressure on CPI inflation,” said Hodes, who expects a 25 basis point hike in rates on Thursday. “The Bank itself has said structural reforms are needed to address low economic growth, not very low interest rates.”
While the Bank is largely focused on domestic data. it does take into account the global context, which typically has a strong influence on the rand’s exchange rate.
Increased inflation concerns were brought into stark relief last week when a shock report showed US consumer inflation spiked to 6.2% in October, the fastest pace in 30 years. That is likely to add pressure on the US Federal Reserve to tighten monetary policy to curb inflation, raising the likelihood that other central banks may follow suit.
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