Another 50 basis point repo rate hike likely, as inflation back at 7%

The Inflation rate was back at 7% again in February, increasing the possibility of another 50 basis points repo rate increase next week, but the most alarming statistic for February is that food inflation was the highest since April 2009 when it was also 13,6%.

The prices of food and non-alcoholic beverages increased by 13,6% over the past 12 months, up from 13,4% recorded in January.

Independent economist, prof. Bonke Dumisa, says this increase will definitely prompt the South African Reserve Bank‘s (Sarb) Monetary Policy Committee (MPC) to raise the repo rate by at least 50 basis points, from 7.25% to 7.75% when they meet next week.

“The MPC increased the repo rate by only 25 basis points at its last meeting when inflation decreased to 6.9%. The MPC may therefore wrongly assume that its last lower repo rate increase was not aggressive enough to lower inflation and may therefore opt for a higher repo rate increase of at least 50 basis points or more.”

ALSO READ: Surge in inflation: Food prices hit highest levels since 2009

Economic research group, Oxford Economics Africa, says the increase was in line with its expectations and marginally higher than the consensus forecast of 6.9% . “The February inflation print strengthens our forecast for another 25 basis points increase in the repo rate. We expect headline inflation to moderate gradually over the coming months and to average 5.8% in 2023.”

The group says it foresees the apex bank wrapping up the current hiking cycle in March, with the repo rate forecast to remain steady at 7.5% for the rest of the year, although the Sarb will remain cognisant of inflationary risks during its policy meeting next week and will likely contend that monetary policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook.

Rolling blackouts hold serious implications for food prices

In addition, the group warns that the incessant power outages are especially damaging to food producers, which will hold serious implications for food price inflation over the near term.

Adriaan Pask, CIO at PSG Wealth, says higher inflation expectations and depreciating currencies continue to reinforce the pressing need for central banks to accelerate the normalisation of their policy rates, tightening global financial conditions.

Luigi Marinus, portfolio manager at PPS Investments, says although the year-on-year increase to transport costs has moderated in line with the oil price decline, South African consumers remain under pressure in an increasing interest rate environment and consistently high increases in food prices in particular.

“The effect of the approved electricity price increase is yet to be included in the inflation print and will add to inflation when it comes into effect.”

He also points out that the global banking landscape has come under pressure recently with the difficulties experienced by Silicon Valley Bank and Credit Suisse, which may have tempered the US Federal Reserve’s monetary policy approach, but there is unlikely to be short-term reprieve in the South African Reserve Bank’s approach.

“With inflation remaining stubbornly above the top end of the target band, the likelihood of another rate hike in the next MPC meeting remains high.”

ALSO READ: Inflation down, but food prices rise to highest in 14 years

Lower inflation expected for 2023 despite increase

Nedbank’s group economic unit says despite today’s upside surprise, it still expects inflation to trend lower off a higher base throughout the year, falling to 4.8% in December and averaging 5.8% for 2023.

”Most of the drag will stem from fuel prices, which will benefit from lower Brent crude prices, which will be dragged down by slower global demand, particularly consumer spending in the major economies.”

The unit expects food inflation to remain sticky but says it is probably near its peak and should also begin trending down during the second quarter, reflecting the lagged effect of the moderation in global food prices and favourable weather conditions.

“However, risks to the inflation outlook remain to the upside due to rising input costs, including the cost of generating electricity from diesel amid persistent load-shedding, unpredictable weather patterns and a vulnerable rand.”

The Rand remains under pressure from the volatile global risk sentiment, while domestic factors, such as power shortages and political noises ahead of the elections next year will also weigh negatively on the local currency.

“In our opinion, today’s inflation numbers seal the deal on another 25 basis point rate hike next week. The MPC will be concerned by the continued acceleration in food prices, which appears to reflect the adverse impact of load-shedding on production costs.

“The MPC will also be alarmed by the acceleration in core and services inflation, which suggest broadening price pressures. While the upside risks remain considerable, we still expect inflation to dip below 5% by the end of the year as the economy slows down to a crawl. At this stage, we see the first cut in the cycle at the November meeting.”