The Reserve Bank takes centre stage this week when its monetary policy committee (MPC) is widely expected to raise interest rates for the third successive meeting.
The key area of focus for the markets and the broader public will be the path that policymakers, led by governor Lesetja Kganyago, will probably follow in coming months given an uncertain global environment that has resulted in increased volatility in financial markets.
Since the last MPC meeting in late January, international oil prices have surged, potentially threatening the outlook on consumer inflation which the Bank at the time expected to average 4.9% for 2022 before easing to 4.5% in 2023 and stabilising at 4.5% in 2024.
Brent crude, of which SA is a net importer, hovered at $106 per barrel on Friday, having risen 37% since the start of 2022.
Russia’s invasion of Ukraine and resulting sanctions against the Moscow government raised supply worries, pushing Brent crude to as high as $139 per barrel, levels not seen in 14 years.
With SA consumers and businesses already paying record high fuel prices, the spike in energy prices could deliver another blow to the SA economy and complicates the task of the Bank, which has to strike a fine balance of keeping prices under control without choking the economy by aggressively tightening policy.
“We knew that the recovery in demand following the pandemic shock would largely be coupled with rising inflation,” said Koketso Mano, an economist at FNB.
“However, heightened uncertainty from the onset of the Russia-Ukraine conflict has sparked a new bout of inflationary pressure.”
Higher energy prices have coincided with the steep rise in international soft commodity prices, as both Russia and Ukraine collectively account for a quarter of global wheat exports and 18% of maize exports. This dynamic could fuel worries about inflation potentially going much higher than the upper limit of 3%-6%, targeted by the Bank.
The MPC is expected to raise rates by 25 basis points to 4.25% on Thursday at the end of its policy meeting, according to Bloomberg median estimate.
Up to now, the hiking cycle that started in November has been modest in SA as the central bank normalised policy from historical lows.
Thursday’s meeting will also come against the backdrop of tighter monetary policy by the developed economies in their efforts to rein in runaway inflation.
The US Federal Reserve last week hiked rates for the first time in three years to fight off inflation that is hovering at a 40-year high.
Stats SA will release its inflation figures on Wednesday. Consumer inflation is likely to have risen to an annual rate of 5.8% in February, according to a Bloomberg median estimate, up from 5.7% in January. The core inflation, which excludes volatile food and energy, is likely to have risen to 3.6% year on year from 3.5%.
“Our core inflation outlook is underpinned by continued recovery in services inflation, clawback pricing in industries that were affected by lockdown as well as potential second-round effects from higher wage and input costs,” Mano said.
“We also consider that the rising cost of living, along with rising interest rates, should dampen household consumption and slow core inflation in the medium term.”
Other key data for the week include SA’s leading indicator, which the Reserve Bank will release on Tuesday, reflecting on January.
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