/ 27 January 2022

Reserve Bank lifts rates again as high inflation takes its toll

The Reserve Bank.
In January, the South African Reserve Bank came out with its dire prognosis for the health of the country’s economy — forecasting GDP growth of just 0.3% in 2023

With elevated inflation bearing down on advanced and emerging economies, the South African Reserve Bank’s monetary policy committee (MPC) has voted to lift the repo rate by another 25 basis points.

The decision — which was not unanimous, with one out of the five committee members voting against the hike — marks the second increase since the Reserve Bank slashed the repo rate to 3.5% amid the pandemic-induced economic downturn. The repo rate, which affects the cost of borrowing, now stands at 4% per year.

The MPC’s decision was made against the backdrop of high inflation, which has become a stubborn feature of the global economy’s recovery as Covid-19-related bottlenecks continue to choke supply chains.

Recent data from the US Bureau of Labour Statistics showed that consumer prices surged 7% in December compared to the same month last year. Inflation in the US has topped 5% for seven consecutive months, with the December number marking the sharpest inflation increase in decades.

Closer to home, consumer price inflation for December surprised on the upside, coming in at 5.9% — a hair away from the Reserve Bank’s ceiling. The 5.9% annual increase marks the highest since March 2017, when the rate was 6.1%.

Elevated inflation in the US, which will likely force the country’s Federal Reserve (Fed) to normalise monetary policy stateside, stands to exert downward pressure on the rand, thus pushing up inflation. Last night’s federal open market committee meeting confirmed the Fed’s more hawkish position on raising rates earlier than previously expected.

The risks to the inflation outlook are assessed to the upside, the MPC said in its statement on Thursday.

“Over the past year and into this year, global supply shortages and strong demand have caused a wide range of prices to accelerate, including raw materials, intermediate inputs and food. Some of these price increases have passed-through to consumer prices in major economies.”

The MPC has revised its oil price prediction up for 2022, with fuel price inflation now forecast at 13.7% (up from 4.6%). Local electricity price inflation for 2021 was 10.2%; the forecast for 2022 has been revised upwards to 14.5% from 14.4%.

“Global producer price and food price inflation continued to surprise higher in recent months and could do so again. Oil prices increased strongly through 2021 and are up sharply year to date. Current oil prices sit well above forecasted levels for this year. Electricity and other administered prices continue to present short- and medium-term risks,” the MPC said in its statement.

“Given the moderate medium- and long-term inflation projections set out above, higher domestic import tariffs, stronger services inflation and higher wage demands present additional upside risks to the inflation forecast.”

The MPC pointed out that global economic conditions are less supportive of emerging and developing economies now than they were for most of this past year.

The MPC noted the risks arising from the possibility of a faster normalisation of global policy rates. These risks, the statement said, are currently built into the Reserve Bank’s forecast, which assumes some rate hikes to begin in about June this year. 

“Although policy settings in advanced economies remain accommodative, higher global inflation is likely to accelerate normalisation of interest rates and balance sheet reductions by major central banks. It is less certain how far the normalisation process will go and the exact timing, and this uncertainty continues to cause financial market turmoil and capital flow volatility.”

The MPC revised South Africa’s economic growth for 2021 downwards from 5.2% to 4.8%. South Africa’s economy, still reeling from the pandemic’s blows, was dealt a second hit in 2021 when unrest swept through parts of the country in July.

GDP is expected to grow 1.7% in 2022. The deceleration in growth from 2021 to 2022, the MPC said, “is primarily a result of the fading rebound from the pandemic, alongside a climbdown from high export prices”.