Even higher inflation and repo rate means more consumer pain ahead

Even higher inflation and more repo rate increases are expected, which in turn will mean even more food and fuel price increases in coming months.

Inflation has reached a five-year peak of 6,5% in May compared to last year, while there is talk of the repo rate increasing by an unprecedented 75 basis points.

However, the Bureau of Economic Research (BER) at Stellenbosch University still maintains that the Monetary Policy Committee (MPC) of the Reserve Bank (Sarb) will only increase the repo rate by 50 basis points, instead of the 25 basis points anticipated earlier.

Headline consumer inflation (CPI) increased by notably more than expected in May, the BR says.

“The upside inflation surprise was largely a food price story, with core CPI remaining relatively subdued below the midpoint (4.5%) of the Sarb inflation target range.”

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Further increase in inflation

However, the sharper-than-expected increase in food costs and another large petrol price hike expected in July will drive a further rise in inflation expectations, the BER says.

“Along with the more aggressive interest rate hike stance adopted by the US central bank, as well as several other central banks, the above-consensus May CPI print has changed our call on the next Sarb policy interest rate move.”

The Sarb is now expected to follow up the 50 basis point increase in May with another 50 basis point increase in July, although a 25 basis points increase was pencilled in for July.

At this stage, the BER still expects the repo rate to peak at 6.25% (current rate at 4.75%), albeit that this point is now set to be reached earlier (first half of 2023) than projected before.

Though the BER does not expect a 75 basis point increase in July in ‘sympathy’ with the Fed and central banks in countries such as Chile, Mexico and Poland that all saw increases of 75 basis points, they say this should not be ruled out and will again be assessed closer to the meeting.

“There are at least three factors arguing against such an aggressive response in SA, namely the lack of meaningful underlying (core) demand-driven inflationary pressure in SA, the fact that the rand exchange rate has been relatively stable around the R16/$ level in the wake of the Fed’s more aggressive stance, and the likelihood that the global recession narrative is likely to ratchet up in the next month.”

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Global recession expectations scaled back

As a result, the Rand is largely unchanged from the starting point (R15.88/$) for the currency and the likelihood that the global recession narrative is likely to ratchet up, which should soften expectations for the magnitude of global interest rate hikes.

“Already, global rate increase expectations were scaled back somewhat last week.”

Inflation has increased surprisingly to 6.5% in May, breaching the 6% upper target of the SARB for the first time in five years and the rate is now well above the midpoint of the target (4.5%). It also did not help that Eskom implemented stage 2 load-shedding from Wednesday, ramped up to stage 4 on Friday, as well as during the weekend.

“Besides increased electricity demand amid acold spell across the country, as well as unplanned generation unit outages, Eskom’s problems were compounded by unprotected labour action after wage talks with unions reached a deadlock.”

Fortunately, the BER says, it is not all doom and gloom on the electricity generation front over the medium term. Eskom identified 18 winning bids from an auction in April to offer independent power producers (IPPs) access to vacant land in Mpumalanga with direct access to the national grid.

“These projects, which on completion will add 1 800MW to SA’s power generation capacity, will be financed by the IPPs. In addition, they will sign direct offtake agreements with private sector companies, a positive step that adds to the sense that, after multiple delays, we could start to see a bunching of green energy investments in SA.”

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End of lockdown, but not higher inflation

The removal of Covid lockdown restriction should also have an immediate positive impact on the economy.

“In general, the removal of the last restrictions should provide welcome support to the local economy that, following solid momentum at the start of the year, was hit by several shocks in the second quarter.”

In global news, the preliminary read on developed country, excluding Japan, purchasing managers’ indices (PMIs) for June added to growing concerns about a sharp growth slowdown and potentially recession, in the US and Europe.