/ 23 March 2022

Reserve Bank set to hike interest rates

Reserve Bank
Consumer inflation is expected to remain close to the central bank’s 6% ceiling, amid war-induced oil price rally (Dean Hutton/ Bloomberg/ Getty Images)

With inflation still elevated well above the South African Reserve Bank’s midpoint target, monetary policy makers are expected to continue hiking rates this week.

The bank’s monetary policy committee is set to meet this Thursday and analysts are forecasting another 25 basis point hike of the repo rate, which affects the cost of borrowing. This will bring the repo rate to 4.25%.

The forecast hike comes as inflation numbers are expected to remain relatively high, as global supply chain chokeholds continue to exert pressure on prices. Statistics South Africa will release its February consumer inflation print on Wednesday morning.

The Bureau for Economic Research is anticipating that inflation will come in at 5.7% year-on-year, unchanged from January, when inflation eased slightly from 5.9% the month prior.

The December print of 5.9% was a hair’s breadth away from the ceiling of the South African Reserve Bank’s target range of 3% to 6%. The central bank aims to keep inflation anchored at the midpoint (4.5%) of that range.

Investec economist Lara Hodes is also expecting consumer inflation to be unchanged at 5.7%. The Bloomberg consensus is that consumer inflation will rise to 5.8% in February and has also pencilled in a 25 basis point repo rate hike.

Her colleague, chief economist Annabel Bishop, has warned that high oil prices — the result of major oil producer Russia launching an assault on Ukraine and the sanctions that have followed — risk pushing South Africa’s consumer inflation rate to more than 6% year-on-year in April. Crude futures rose to more than $114 per barrel on Tuesday amid growing support for a EU-wide ban on the purchase of Russian oil.

If the average oil price rises to $150 per barrel, South Africa’s consumer inflation could hit 7% year-on-year in May. But this scenario is not expected, Bishop said.

Central banks in advanced economies have reacted to oil price-related inflation pressures. Last week, the Bank of England raised its key rate for the third consecutive time, from 0.5% to 0.75%. The rate is now back to its pre-pandemic level.

The Bank of England expects that inflation will breach 8% later this year. “Regarding inflation, the invasion of Ukraine by Russia has led to further large increases in energy and other commodity prices including food prices. It is also likely to exacerbate global supply chain disruptions, and has increased the uncertainty around the economic outlook significantly,” the bank said in its monetary policy statement.

“Global inflationary pressures will strengthen considerably further over coming months, while growth in economies that are net energy importers, including the UK, is likely to slow.”

Earlier in March, Bishop noted that the Reserve Bank was likely to revise up its oil price forecasts, which will push up its inflation forecasts, thus increasing support for a rate hike in March. “However, higher interest rates and inflation rates would push up consumer financial vulnerability.”

South African consumers continue to feel the pinch of high oil prices, with a record increase expected next Month. Petrol is projected to cost R24 per litre in April, based on current data.
If realised at month end, the Automobile Associationnoted, “these will be the biggest increases to fuel prices in South Africa’s history and will, undoubtedly, have major ramifications for all consumers and the economy in general”.