Inflation and repo rate roller coaster ride expected this year

An inflation and repo rate roller coaster ride are expected this year after inflation increased to 5,9% in December, with economists expecting the inflation rate to stay above 6% and that the Monetary Policy Committee of the Reserve Bank will have to increase the repo rate to keep inflation in check.

The Reserve Bank (Sarb) has the constitutional mandate to protect the value of the rand by keeping inflation low and steady and uses interest rates to influence the level of inflation. To protect the value of the rand, the Sarb uses inflation targeting to maintain consumer price inflation between 3% and 6%.

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Inflation could reach 8%

Economist Mike Schűssler says he was not surprised by the increase in the inflation rate. “With inflation up all around the world and central banks printing money, the inflation genie is out of the bottle and to put it back in may take some time.”

He expects inflation to definitely go above 6% or even 7% and if Eskom succeeds in getting an increase above 20% and water tariffs go above 10%, he says inflation can even increase to 8%. However, he says, the Sarb will not raise the repo rate too high because the economy is weak.

Prof. Jannie Rossouw, visiting professor at the Wits Business School, says the announcement of the inflation rate at 5,9% was surprising and upsetting because inflation was not expected to increase so quickly.

“Inflation is now already at the top margin of the committee’s target for inflation, which means that the committee will have no choice but to increase the repo rate at its next sitting on Thursday. This increase also signals that inflation can rise above 6% and then the Sarb will have3 to make adjustments.”

Rossouw finds it very concerning that the inflation rate is so far above the bottom of the inflation target of 4,5%. “Inflation is also accelerating in other developing economies but will stabilise. However, South Africa has a history of high inflation, which means it can become an issue again.”

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Repo rate will go up by 25 basis points to start with

He expects the committee to increase the repo rate by 25 basis points on Thursday, but says if inflation does not stop increasing, the committee will have to take more dramatic steps such as increasing the repo rate by 50 basis points at a time.

Schűssler also expects an increase of 25 basis points only, but he expects four repo rate increases of 25 basis points each or even five of which one increase could be 50 basis points.

However, Rossouw says it is also important to consider the positive side of increasing interest rates, as it benefits people who live on interest from their investments. For consumers with debts who will be affected by the higher interest rates, he has an important piece of advice: do not take on any new debt.