SA’s consumer prices edged closer to the upper band of the Reserve Bank’s target range on Wednesday, throwing the Bank deeper in a quandary about taming inflation without choking economic growth.
Data released by Stats SA on Wednesday showed that the inflation rate accelerated to 5.9% in March, closer to the ceiling of the central bank’s target range of 3% and 6%.
It was the 11th consecutive month that annual price increases have been above the mid-point of the official range — the 4.5% point at which the monetary policy committee (MPC) prefers to anchor expectations.
The increase in the cost of living was mainly due to global supply shortages and Covid-related disruptions to the world’s transport networks, and was not far from analysts’ estimates for 6% inflation.
The outlook has deteriorated significantly because of the surge in global oil and food prices caused by Russia’s invasion of Ukraine and the resulting sanctions on Russia’s exports.
Rising consumer prices are taking policymakers deeper into a dilemma — faced by central bankers across the globe — of bringing down inflation without constraining economic growth.
The already weak economy took a blow last week when floods hit KwaZulu-Natal, disrupting operations in the country’s busiest port and causing billions of rand in damage to infrastructure.
Analysts said they anticipate headline inflation breaching the 6% upper limit of the inflation target range in the second quarter of this year, warranting further tightening by the MPC to avoid material de-anchoring — a situation where short-term price shocks can change long-term expectations.
The rand weakened in response to the release, falling convincingly through R15/$ for the first time in a month. By late afternoon, the domestic currency had fallen 0.86% to R15.07.
The outlook for inflation has deteriorated significantly because of the surge in global oil and food prices caused by the invasion of Ukraine and sanctions on Russian exports.
Chief economist at Don Consultancy Group Chifi Mhango said the rand remains vulnerable to changing global risk appetites and tighter US monetary policy. Administered prices, particularly electricity tariffs, continue to rise at rates above the 4.5% midpoint of the Bank target range.
Nedbank economist Johannes Khosa said that given the rising upside risks to the inflation outlook and the rand’s vulnerability to tighter US monetary policy, the MPC is likely to raise the interest rate by 25 basis points (bps) at each of the coming MPC meetings until March 2023.
This movement is broadly in line with the Bank’s quarterly projection model, which the MPC uses as a broad policy guide. It showed in March that the repurchase rate was likely to be 5.06%.
At the previous MPC meeting in March, the Reserve Bank revised its inflation projections sharply higher and presented a hawkish statement, heavily influenced by the war-induced surge in international oil and grain prices.
The MPC raised the repo rate by a further 25 bps, with three committee members favouring a more aggressive 50 bps hike.
The Bank said it expected headline inflation to breach the upper limit of the inflation targeting range, hitting 6.2% in the second quarter of this year, before easing gradually to 4.5% in the final quarter of 2024.
The MPC also stressed that risks to the inflation forecasts were firmly on the upside and highly dependent on the trajectory of the war.
Update: April 20 2022
This article has been updated with new currency information and minor changes.
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