The SA Reserve Bank takes centre stage this week when its monetary policy committee (MPC) is widely expected to raise interest rates for the fourth successive meeting.
The MPC will announce its latest interest rate decision on Thursday and is increasingly expected to deliver a 50 basis point (bps) hike to 4.75% to contain high inflation, which is near the upper limit of its 3-6% target range.
Inflationary pressures have increased and recently worsened due to the war in Ukraine, which has seen oil prices settle above $100 a barrel. Food inflation has also heightened on fears of global supply shortages.
Thursday’s meeting will come against the backdrop of tighter monetary policy by the developed economies in their efforts to rein in runaway inflation. Earlier in May the US Federal Reserve hiked rates for the first time in three years to fight off inflation, which is hovering at a 40-year high.
SA’s consumer price index (CPI) for March came in at 5.9% —above the Reserve Bank’s midpoint of 4.5%. April inflation data will be released a day before the MPC meeting, which may influence how aggressively they hike rates.
FNB economists said their base case is for the MPC to continue with incremental increases of 25 bps. The Bloomberg consensus forecast is for a 50 bps hike.
“Given the incomplete economic recovery and a stagnant labour market, we expect the SARB [SA Reserve Bank] to proceed cautiously with 25 bps rate increments. This is despite our Taylor rule analysis, which indicates that the SARB is moderately behind the curve, showing it should have hiked more relative to its actions so far,” the FNB economists said.
“The MPC’s judgment should take a delicate balance to minimise derailing the precarious economic recovery, especially coming from the profound impact of the pandemic.”
Alexforbes executive chief economist Isaah Mhlanga believes the MPC will and should increase the rate by 50 bps to cope with global financial conditions.
“We expect SA inflation to rise above the SARB’s upper target of 6% driven by fuel, electricity, food and goods prices. Further, we expect global financial conditions to tighten faster, resulting in a weaker USD/ZAR exchange rate. Thus the SARB must normalise in line with the Fed and other major central banks,” he said.
Data on consumer price inflation for April will be published on Wednesday. Headline inflation was 5.9% year on year in March, up from 5.7% in February. Core inflation recorded 3.8% year on year and 0.8% month to month.
“The conflict between Ukraine and Russia has weighed heavily on a number of global commodity prices which were already affected by supply chain constraints linked to the pandemic,” said Investec economist Lara Hodes.
“We expect headline inflation to lift to 6% in April and average 6.3% in the second quarter, as supply-side price pressures continue to mount and spill over to core items,” added Hodes.
Also on Wednesday, retail sales data for March will be published. Sales volumes unexpectedly declined in February, falling 0.9% year on year from a robust 7.7% year-on-year increase in the previous month. The month-on-month seasonally adjusted volumes decreased by 0.5% after an increase of 2.3% in January.
“The decline in volume sales is against the backdrop of rising interest rates, higher costs of living and generally low consumer confidence,” the FNB economists said.
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