Consumers and businesses face another interest rate increase as soon as next week after inflation exceeded economists’ forecasts to log its biggest annual increase in five years.
Inflation as measured by Stats SA’s consumer price index (CPI) hit 5.9% year on year in December, its biggest annual increase since March 2017 when the rate was 6.1%.
Economists polled by Bloomberg expected an increase to 5.7%, from 5.5% in November. The data, released on Wednesday, heaps pressure on the Reserve Bank — which raised interest rates for the first time in three years in November — to hike again when its monetary policy committee meets |next week.
The Bank will give its updated inflation forecasts, which may then signal to the market whether the pace of increases will accelerate.
At present the central bank’s model suggests four hikes of 25 basis points each in every quarter of 2022.
But the need to strike a balance of keeping inflation within its 3%-6% target range without jeopardising the fragile economic recovery may support the argument for the total of increases to be shallower.
The monetary policy committee will increase rates by 25 basis points at least three times in 2022, according to Stanlib economist Kevin Lings, who expects consumer inflation to temporarily breach the upper limit of the target range.
“There are, unfortunately, numerous upside risks to monitor, including further upward pressure on wages, a 20% electricity increase by Eskom, a prolonged spike in agricultural and food prices, higher imported inflation given elevated global inflation, and unexpected large increases in water and education fees,” he said.
The main factor behind the increase in CPI was the transport category, which recorded an annual increase of 16.8% in December. It was the only major group in the inflation basket that increased above the 6% upper limit of the Bank’s target range, according to Stats SA, which noted that fuel prices had risen 40.5% on the previous year.
Inflation has been rising sharply across the world, reflecting supply-chain constraints and a global rise in energy prices, with oil hitting a seven-year high.
Price increases have added weight to arguments that inflation is becoming endemic rather than transitory, boding ill for pandemic-hit and debt-laden consumers at home, whose household debt to disposable income stood at about 68% in the third quarter.
Tighter policy in developed markets will increase pressure to hike rates locally to protect the yield advantage of SA assets.
The price increases as well as the expected hikes in interest rates could turn out to be a problem for President Cyril Ramaphosa, whose biggest task is to put the economy back on a robust growth path, as consumer spending accounts for about 60% of GDP.
Separately, Stats SA data showed that retail trade sales rose 3.3% in November year on year, as cash-strapped consumers snapped up Black Friday specials.
The rand strengthened 1% against the dollar, the most in a week, to trade at R15.34/$ by 4pm. Against the euro, it was up by a similar margin at €17.37 and strengthened 0.81% against the British pound at £20.88.
The yields on the benchmark R2030 dropped 0.79% to 9.38% despite worse-than-expected local inflation figures. Usually, the prospect of higher interest rates dims demand for bonds by making the fixed coupon relatively unattractive.
“By all accounts the brief jump in yields was taken as a buying opportunity by bargain hunters, and bonds look set to end better than Tuesday’s closing levels,” said Ashley Dickinson, fixed-income analyst at Sasfin Securities.
International oil prices continued to push higher, with Brent crude at a seven-year high at about $88 a barrel.
In SA, incessant rains have raised concern about summer grain crops being washed away, which would in turn raise the prices of food. Food and non-alcoholic beverages increased 5.5% year on year and contributed a percentage point to the total CPI annual rate of 5.9%.
Housing and utilities increased by 4.2% year on year, and also contributed one percentage point.
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