Inflation expectations before next repo rate meeting

Analysts, business people and trade unions expect inflation to increase further ahead of the next repo rate meeting, where the Monetary Policy Committee (MPC) of the Reserve Bank (Sarb) will decide if the repo rate will be increased.

According to a survey the Bureau for Economic Research (BER), a division of Stellenbosch University, conducted on behalf of the Sarb, inflation expectations are still increasing. The Sarb commissioned the BER in 2001 to conduct a quarterly survey to measure inflation expectations and other macro-economic variables related to inflation.

The survey covers four social groups: analysts, business people, senior representatives of trade unions and households, because each group has a different perspective and impact on inflation, such as business people who affect prices in the real economy, while analysts affect financial markets. In contrast, trade union representatives and households, in their role as employees, affect wage increases, which in turn have a big impact on inflation. 

In the second quarter the average inflation expectations increased by 0.2 percentage points to 6.5% in 2023, by 0.1% to 5.9% for 2024 and by 0.1% to 5.6% in 2025.

ALSO READ: Inflation at 13-month low in May

Between the first and second quarter surveys, the annual rate of increase for headline consumer inflation trended down from 7% in February 2023 to 6.3% in May. The BER says analysts foresee the lowest inflation rate over all three years, while business people expect the highest rate with trade unions not far behind.

Five-year-ahead inflation expectations

However, average five-year-ahead inflation expectations ticked down to 5.2%, from 5.5% in the previous survey. Households’ one-year-ahead inflation expectations surged from 7% in the first quarter to 8.1% in the second quarter, the highest since 2010. Households also project higher inflation in the medium term, with the five-year expectation increasing to 10.7%, from 9.9%.

The three social groups downscaled their expectation for real gross domestic product (GDP) growth on average to 0.6% in 2023 during the second quarter, notably lower than the 1% anticipated during the first quarter. For 2024, the average growth expectation is 1.4%, largely unchanged from 1.5% before.

In addition, the survey respondents lowered their forecast for salary and wage growth in 2023 and 2024. They previously expected wages to increase by 5.3% this year, but now trimmed it to 5%, while wage growth of 5% is also penciled in for next year.

The MPC also uses the results of the inflation expectations survey when it decides on the interest rate. According to the BER, the MPC will be concerned if inflation expectations increase, inflation expectations are significantly above the midpoint of the inflation target range of 3% to 6% and/or the other inflation indicators deteriorate.

“Rising inflation expectations may, for example, lead to higher wage demands as workers feel they must be compensated for the higher expected inflation in future. Businesses may also adjust their price increases upwards if demand is robust enough.”

The BER says to prevent higher expectations from becoming a reality, the Sarb may be forced to increase the interest rate. If inflation expectations and other indicators decline, the opposite happens.

The MPC has so far increased the repo rate by 475 basis points to 8.25%, the highest level in 14 years since it started tightening monetary policy in November 2021.

Earlier this week, Sarb governor Lesetja Kganyago and deputy governor Kuben Naidoo said when the MPC is confident that inflation is returning to the midpoint of the target range the hikes will cease.