/ 22 November 2023

Inflation rises towards Reserve Bank’s upper limit, pointing to rate hikes down the line

Reserve Bank
Inflation ticked up within a hair's breadth of the South Africa Reserve Bank’s upper limit in October, suggesting there could still be interest rate hikes down the line, even if monetary policymakers keep them on hold as expected this week.

Inflation ticked up within a hair’s breadth of the South Africa Reserve Bank’s upper limit in October, suggesting there could still be interest rate hikes down the line, even if monetary policymakers keep them on hold as expected this week.

Data from Statistics South Africa on Wednesday showed that consumer inflation increased to 5.9% year-on-year last month from 5.4% in September. The Reserve Bank aims to keep inflation within a 3% to 6% target range. Inflation floated above the 6% upper limit for 13 months, before finally falling back within the target range in June this year.

A higher inflation number was expected by analysts, but 5.9% is still higher than consensus forecasts. 

On Thursday, the Reserve Bank’s monetary policy committee will announce its next interest rate decision. Prior to Wednesday’s inflation data, it was widely expected that the committee would opt to leave the cost of borrowing unchanged. And, despite higher-than-expected October inflation, there is still reason to believe that the Reserve Bank will hold off on hiking interest rates — which are already in restrictive territory.

Indeed, the Bureau for Economic Research (BER) expected that inflation would come in above consensus, forecasting a 5.8% yearly rate. Despite this, the BER also forecast that the Reserve Bank would keep interest rates unchanged, citing the fact that oil prices and the rand’s weakness no longer pose the same risk as they did earlier this year.

Core inflation, which excludes food and energy prices, is trending in line with the central bank’s 4.5% target, indicating a notable easing in underlying price pressures. According to the StatsSA data, core inflation came in at 4.4% year-on-year in October.

That said, the Reserve Bank will probably be watching developments in the United States closely. Though the US Federal Open Market Committee (FOMC) opted to hold interest rates for a second consecutive time on 1 November, minutes from that meeting revealed continued hawkishness on the Fed’s part.

Released last night, the minutes noted that inflation remained well above the committee’s 2% longer-run objective “and that elevated inflation was continuing to harm businesses and households, particularly low-income households”.

In her analysis of the FOMC minutes, Investec chief economist Annabel Bishop noted that the committee is looking to mollify expectations of imminent interest rate cuts.

 “Market expectations for interest rate cuts next year have been building, and the Fed worries this will positively impact consumers and businesses by causing spending and demand to rise, and so derail its efforts to lower inflation,” Bishop wrote in a research note published on Wednesday morning.

The FOMC is scheduled to deliver its next interest rate decision on 13 December. According to Bishop, there are still expectations of no further rate hikes this year or next.