/ 17 November 2021

South African inflation unchanged as some economists expect repo rate lift-off

Inflation Rises To 5.4%, Surprising Markets
Today, the South African Reserve Bank will yet again in all likelihood raise interest rates to fend off the rising tide of inflation

In line with expectations, annual consumer price inflation was 5% in October, unchanged from last month. The headline consumer price index (CPI) increased by a modest 0.2% month on month.

South Africa’s inflation numbers, which were released on Wednesday morning, come amid record price spikes abroad as supply bottlenecks take their toll. 

In Germany, the inflation rate accelerated to 4.5% year-on-year in October, the highest since August 1993. China’s annual inflation rate more than doubled: to 1.5% in October from 0.7% the previous month. Last week, data released by the US Bureau of Labour Statistics showed that inflation stateside surged 6.2% in October from a year ago, marking the fastest annual pace since 1990. 

The US inflation numbers came a week after the country’s central bank delivered its federal open market committee statement, which maintained that elevated inflation will remain transitory despite fears of stagflation. The US Federal Reserve (Fed) held the interest rate, but elected to taper its purchases of government and corporate bonds.

The shock inflation numbers have, however, stoked fears that the Fed will be forced to quit its dovish stance on interest rate hikes.

Although US inflation surprised on the upside, South Africa’s CPI numbers were in line with forecasts. Core CPI was expected to remain subdued, reflecting the effects of muted domestic demand side pressures.

The country’s inflation data comes ahead of a briefing on Thursday by the South African Reserve Bank’s monetary policy committee (MPC), during which some expect the central bank to announce the normalisation of rates. 

In 2020, the MPC cut the repo rate, which determines the domestic interest rate, by 300 basis points as the Covid-19 pandemic felled the local economy.

In a research note, Investec chief economist Annabel Bishop said last week that the Thursday MPC announcement could reflect a change in the central bank’s stance, particularly because its emerging market counterparts have already started on the path towards policy normalisation.

Rate hikes in emerging market economies, Bishop explained, have generally led to greater currency strength, which is helpful in combating inflation.

“High global inflation, from base effects and elevated commodity prices, has been extended by the rapid increase in house prices in many areas in the world, as well as supply-chain disruptions,” Bishop noted.

“More recently, higher oil prices and salary increases have contributed to inflationary pressures, as the pandemic effects continue to unwind. In South Africa, the sharp rise in global oil prices, along with some rand weakness has seen an upwards push to inflation which is likely to continue into next year, with CPI inflation averaging above 5% year on year.”

Fuel and power are key drivers of inflation in South Africa, Bishop added. Load-shedding and above-inflation escalations in electricity prices have added to production costs.

“South Africa will see further pressure on its exchange rate for depreciation if the Sarb [the South African Reserve Bank] does not begin hiking interest rates, in line with many other emerging market economies, in turn risking upwards pressure on CPI inflation, as rand weakness comes through directly, and immediately on the petrol price as it is adjusted on the first Wednesday of each month.”

The Bureau for Economic Research (BER) is also expecting that the MPC will vote in favour of a rate hike, noting that the decision will likely not be unanimous.

The BER noted last week’s Bloomberg survey in which 15 analysts were almost evenly split between those expecting the repo rate to be kept unchanged and those that have pencilled in a 25 basis point hike. “If nothing else, the lack of an overwhelming consensus emphasises that the decision should be close,” the BER said in its weekly update.

Wednesday’s CPI figures will have no bearing on the MPC’s decision, the BER said. “It is, of course, all about the Sarb’s inflation and real GDP growth outlook, as well as the risks attached to the central bank’s forecast.”