The Reserve Bank stuck to its 2023 inflation forecasts on Wednesday, saying consumer prices will return to its target band later in the year even after data showed inflation unexpectedly accelerated for the second month running in March.
In an exclusive interview with Business Day on Wednesday, governor Lesetja Kganyago said inflation would return to the 3%-6% target range in the fourth quarter as previously forecast despite the sticky food inflation, which he acknowledged caught the Bank by surprise.
“We were surprised by food prices. We expected food prices to rise by 13%, but they rose over 14%. Worryingly is that global food prices in dollar terms have come down significantly and food prices in SA are still climbing in an environment where we have actually had good rains,” Kganyago said.
Rand exchange rate
“It talks firstly to a weaker rand exchange rate that is keeping food prices sticky and secondly there are idiosyncrasies affecting inflation,” he explained, referring to extra costs incurred by businesses to provide alternative backup power as power utility Eskom struggled to provide adequate energy supply.
His comments came after Stats SA data showed that headline consumer price index (CPI) rose for the second time in a row in March, raising the odds that the central bank could again hike interest rates during its meeting in May.
Forward-rate agreements starting in two months — used to speculate on borrowing costs — show traders are fully pricing in a quarter-point increase in the repurchase rate, with a chance of a bigger 50-basis point move on May 25 when the monetary policy committee announces its next decision. The headline CPI rose 7.1% year on year, against market forecasts of 6.9%, driven in part by higher food prices.
Agricultural Business Chamber (Agbiz) chief economist Wandile Sihlobo expects domestic food inflation, at a 15-year high, to begin to moderate in the second half of the year.
“For April, we will likely see the continuation of the tail-end effects of the high grain prices of last year. If sustained, the current relatively cheaper grain prices will filter mainly in the year’s second half.
“There is a lag between three and five months between farm and retail prices of some products,” he said.
The Bank is caught in a proverbial rock-and-hard-place situation of having to rein in inflation by hiking rates when the economy is very weak.
Since the tightening cycle began in November 2021, the Bank has hiked rates by a cumulative 425 basis points to 7.75%, a level that is deemed to be restrictive. The policy adjustments over this period have largely unwound the stimulus provided to businesses and households at the height of the Covid-19 pandemic.
Capital Economics emerging markets economist Virág Fórizs said in a note that the Bank was likely to hike by another 25 basis points to 8% given the “uncomfortably high” core inflation and risks posed by load-shedding on the inflation outlook.
Core inflation, which strips out energy and food, rose 5.2% on an annual basis, matching the increase recorded in February.
Month-on-month core inflation was unchanged too at 0.8%.
The hotter-than-expected inflation reading is a blow to already struggling consumers and businesses.
At its last meeting in March, the Bank surprised analysts with a larger-than-expected 50 basis-point hike. With Bloomberg
Update: April 19 2023
This article has been updated with governor Lesetja Kganyago’s comments.
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