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The South African Reserve Bank has increased interest rates for the fifth time in a row on Thursday.
The bank hiked the repo rate above expectations by 0.75% to 5.5% due to increased risks of inflation and the economic outlook.
Headline consumer price inflation (CPI) increased above the median, reaching 13-year highs, as it surged to 7.4% in June.
Driven by high food, fuel and administered prices, CPI increased by 1.1% on a month-on-month basis.
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Food and non-alcoholic beverages increased by 8.6% year on year, contributing 1.5 percentage points to the overall CPI number. Meanwhile, transport increased by 20% year on year in June, adding 2.7 percentage points to headline inflation.
Annual electricity price inflation was expected to reach 11% this year while food inflation was expected to rise to 7.4% in 2022 up from 6.6%. The bureau for economic research inflation’s expectation was elevated at 6% in the second quarter.
The Reserve Bank expects inflation to remain elevated above its target until the second quarter of 2023.
Reserve Bank governor Lesetja Kganyago said:
“You can rest assured that the Reserve Bank is determined to act on the rise in inflation that we have seen. We are cognisant of the risks going forward and we are prepared to act on those risks.
“We also hear the cries of South Africans about the rising prices and the inflation eroding their income, salaries and wages. We are determined as the Reserve Bank to protect the incomes of South Africans and the steps that we have taken so far to act against rising inflation demonstrate our determination to protect the incomes of South Africans.”
FNB CEO Jacques Celliers said the Reserve Bank’s monetary policy committee’s stance was in line with longer-term trends.
“Consumers and borrowers should, however, be aware that further rate hikes by the central bank are a possibility in the coming months. We also expect upward consumer price pressures to remain in place for several months,” he explained.
The forecast for core inflation was higher at 4.3% in 2022 and was expected to rise to 5.6% in 2023. Core inflation excludes food, fuel and administered price inflation.
FNB chief economist Mamello Matikinca said the Monetary Policy Committee (MPC) was concerned about second-round effects from supply-side pressures, which would drive core inflation higher.
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“Furthermore, the aggressive lift in interest rates in the US has implications for the interest rate differential between South Africa and the US, the narrowing which makes the country’s assets less attractive.
However, recession fears are growing as the aggressive tightening in global financial conditions has exacerbated the impact of resurgent waves of Covid-19 (specifically in China), supply chain disruptions, and the Russia-Ukraine conflict on the momentum of global growth.”
Kganyago expressed concern about the inflationary impact of wage settlements that were consistently above expected inflation across the economy. This followed Eskom’s 7% wage settlement, among others.
“That tells you that you’re having generalised increases across the economy and it could lead to a wage price spiral, which is going to take even more drastic policy measures from a monetary policy perspective to deal with inflation and we shouldn't’t do that.”
The MPC upwardly revised domestic economic growth projections from 1.7% to 2%, but for the second quarter of 2022 was expected to have contracted by 1.1%. In the third and fourth quarters, the MPC expects the economy to expand by only 0.7% and 0.4%, respectively, due to load shedding, among other things.
“We are primarily targeting inflation and we stabilise growth around trends. We always have to adjust policy to make sure that we don’t deviate too far from the trend, but our primary responsibility is price stability. He said:
This is what economists call stagflation.
We have to deal with inflation because failure to do so at this point would mean it is going to be costlier to make the adjustments in the future, which might actually choke growth even further if we don’t act timeously. Unfortunately, that’s what many central banks are faced with at the moment.”
