The Reserve Bank has maintained the repo — at which it lends to commercial banks — steady at 8.25% for five consecutive meetings, since hiking it by 50 basis points in May 2023.
Food prices in South Africa are expected to stabilise over the next six months, but economists are warning about the risks of spillovers from international inflation in the short term.
The South African Reserve Bank has made it quite clear that it is trying to distinguish between locally generated and “imported” inflation, notes Lullu Krugel, chief economist at PwC. However, she said the bank was also aware of how higher international oil prices, for example, could hit local transport costs through second-round effects.
“From their numbers, it seems that they have already seen inflation reaching its highest point [over 5%]. However, as is the case with the [Reserve Bank’s monetary policy committee], PwC is keeping an eye on global developments and spillover effects from inflation. If we see it materialise, it would be over the next six or so months,” Krugel said.
The monetary policy committee kept interest rates at a low of 3.5% last week, saying it expected food and petrol price inflation to stabilise in 2022. The central bank identified global producer-price inflation among the short-term risks to the outlook, although governor Lesetja Kganyago said domestic inflation was not too affected by that yet.
The bank sees its decision to keep rates on hold as highly accommodative still, given the short-term and long-term risks to annual headline inflation, which accelerated to 5.2% in May from 4.4% in April, Statistics South Africa data showed. This was above the 4.5% midpoint of the Reserve Bank’s 3% to 6% target range. It was also the highest point since November 2018 when the rate was also 5.2%. Inflation eased back to 4.9% in June.
Increased global commodity prices are driving most of the impact on food and petrol and the Reserve Bank is very aware of the risks as clearly highlighted in its models and approach, and in the comments from the governor, Krugel said.
In its latest consumer price index release, Statistics South Africa said: “If annual consumer inflation is recalculated with the exclusion of food and non-alcoholic beverages and fuel, it comes to 3.4% in June. This is well below the 4.9% headline rate, indicating that these products are important drivers of inflation,”
The negative impact of the Covid-19 pandemic on job security and economic activity has put consumers and businesses under increasing pressure, but historically low interest rates have taken some of the sting off by making credit cheaper.
The June 2021 Household Affordability Index showed that the basic food basket decreased by 0.2% from R4 137.11 in May to R4 128.23 in June, but when analysed over 10 months, this was an increase of 7.1% from R3 856.34 in September last year.
Reserve Bank governor Kganyago warned last week that there was anecdotal evidence suggesting that the recent violent unrest in the Gauteng and KwaZulu-Natal provinces had pushed the prices of certain goods higher as a result of panic buying.
The central bank said a weaker rand currency and higher tariffs presented longer term risks to inflation.
According to economist Dr Iraj Arbedian, global interest rates are likely to rise globally over the next few months, which could push the Reserve Bank to similarly raise South Africa’s rates.
“To the extent that our exchange rate is also depreciating for technical reasons, we are going to have rising imported inflation and that might also reach a point where the Reserve Bank may have to take preemptive steps to raise interest rates,” he said.
Rates are still quite low, however, even as the central bank’s model predicts a 25 basis point increase in the fourth quarter.
PwC’s Krugel said “interest rate increases will have an impact on both consumers and businesses and, in my opinion, this contributes to the [monetary policy committee’s] decision to try and push these hikes out as far as possible.”
Consumers and small- and medium-sized businesses in particular were “under a lot of pressure at the moment”, she said, with job losses at lower income levels and the negative impact on businesses in certain sectors, particularly the hospitality industry.
[/membership]