Reserve Bank governor Lesetja Kganyago
The US Federal Reserve has pushed ahead with its hiking cycle, despite the turmoil in the banking sector. The 25 basis point hike stateside supports another interest rate hike by the South African Reserve Bank.
On Wednesday, the Federal Open Market Committee (FOMC) announced its decision to raise the federal funds rate from 4.75% to 5%, citing still-elevated inflation.
Data released last week showed that US inflation cooled to 6% year-on-year last month, down from 6.4%. However, the core inflation rate — which excludes food and energy costs — slowed by just 0.1 percentage points to 5.5% year-on-year. This was as monthly core inflation surprised on the upside, accelerating to 0.5% month-on-month from 0.4%.
Though the uptick in monthly core inflation ought to have cemented the 25 basis point hike, questions remained whether the Fed would push on given the recent collapse of California-based tech lender Silicon Valley Bank.
The FOMC assured that the US banking system was sound and resilient. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain,” it noted.
The FOMC’s decision comes a week ahead of the South African Reserve Bank’s monetary policy committee (MPC) meeting. The MPC will be weighing up whether to implement another interest rate hike in order to put a lid on still-sticky inflation.
(John McCann/M&G)
Data released this week showed that domestic inflation ticked up for the first time in four months, reaching 7% year-on-year last month, up from 6.9%. Moreover, the consumer price index rose by 0.7% between January and last month — representing the largest monthly increase since July, when inflation hit its highest level since 2009.
Worryingly, last month’s core inflation rate rose to 5.2% year-on-year (from 4.9%). Investec chief economist Annabel Bishop noted this will be a concern for the Reserve Bank, which she said is likely to hike interest rates at the end of this month.
The MPC is also influenced by the direction of US interest rates, she added. Prior to the Fed’s announcement, Bishop said a 25 basis point hike was mostly factored in, with the Reserve Bank likely to deliver the same move.
Another interest rate hike will throw cold water on glacial economic growth. At its last meeting, the MPC forecast that the economy would grow by a meagre 0.3% this year, as consumers and businesses grapple with the ongoing energy crisis.
But on Wednesday, the International Monetary Fund (IMF) delivered an even more dire prognosis of the health of the country’s economy, forecasting that GDP growth was projected to decelerate sharply to 0.1% this year. The country’s near-term growth outlook has deteriorated due to a significant increase in the intensity of power cuts, as well as weaker commodity prices, the IMF said.
In the medium term, the IMF added, growth is expected to rebound, though only to about 1.5% per year, with income per capita likely to stagnate as a result.