On the eve of the interest rate decision by the Reserve Bank’s monetary policy committee, a report showed that inflation stayed close to touching distance of the upper end of the target, supporting the case for a third consecutive increase.
Stats SA said on Wednesday that the rate of change in the consumer price index was at 5.7% in February, unchanged from January, the figure for which had been down from 5.9% in December. The last reading of 2021 was the highest since early 2017. The Bank has a target range of 3%-6%.
Headline inflation came slightly below the 5.8% consensus estimate of economists surveyed by Bloomberg. Stats SA said prices increased 0.2% from January. Core inflation, which excludes volatile items such as oil and food, rose an annual 3.5%, which, according to FNB economist Koketso Mano, shows weak underlying demand in the economy.
All but two of 22 economists in a Bloomberg survey expect the Bank to hike rates by 25 basis points on Thursday, with one expecting no change and another seeing the repo rate jumping 50 basis points to 4.5%. Economists will be on the lookout for changes in the Bank’s inflation forecasts and whether they see it staying away from the midpoint of the target range for longer, given higher commodity prices due to Russia’s invasion of Ukraine.
Bloomberg reported that forward-rate agreements starting in one month, used to speculate on borrowing costs, show traders have fully priced in a quarter-point increase in the repo rate, while the expectations for a 50 basis-point increase were at 59% on Wednesday morning.
IG Group senior market analyst Shaun Murison told Business Day that a hike on Thursday is a foregone conclusion, and that there is an outside chance of a 50-basis point move. The Bank might be influenced by peers such as the US Federal Reserve, which has become more hawkish. The Bank of England has brought its main rate to levels before the Covid-19 outbreak. At 4% now, the repo rate in SA was 6.25% at the start of 2020.
“This perhaps provides added incentive [for the Bank] to increase rates in congruence with its peers and try limit capital outflows,” said Murison.
Higher rates overseas could weaken the rand, and push up the price of imported goods, as they reduce the appeal of holding SA assets, which are seen to be risky.
Yet, the rand has been among the most resilient emerging-market economies in 2022, and on Wednesday traded as strong as R14.8028, the firmest level since October.
Economists expect inflation to accelerate further in March given a spike in petrol prices to a record of more than R24/l. The conflict in Ukraine is also putting upward pressure on food prices, with the countries involved being among the biggest wheat exporters.
Mano said another inflationary risk would be an increase in consumers’ inflation expectations, which could feed through to demands for higher wage increases.
“Unlike temporary steep increases in fuel and food prices, a lift in underlying inflation would be stickier and affect our longer-term inflation view,” Mano said.
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