The outlook for inflation deteriorated in January after inflation expectations accelerated to 6.3% for 2023 in January, exceeding the upper limit of the Reserve Bank’s 3% to 6% target band.
The Bureau for Economic Research, which conducts the inflation expectations survey on behalf of the Reserve Bank, found that analysts, business people and trade unions anticipated inflation to come in 6.3%, up from 6.1% in 2023 and 5.8% in 2024.
Inflation is only expected to subside to 5.5% in 2025, far above the 4.5% sweet spot for the central bank. These projections come ahead of the Reserve Bank’s monetary policy committee (MPC) meeting next week to decide on whether to increase the repurchase (repo) rate that currently sits at 7.5%. Inflation expectations are part of the data that the MPC considers when deciding on rates.
ETM Analytics' co-head of financial markets Kieran Siney said: "There has been a significant repricing in the implied outlook for interest rates in SA in recent days. Financial markets are now pricing in less than a 50% probability of a 25bps rate hike in March compared to almost a 100% probability of two 25bps rate hikes, one in March and one in May, at the start of last week."
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Inflation has remained sticky and has not come down as quickly as had been anticipated. While domestic inflation has started slowly tapering down, it is still very high. The January consumer price inflation (CPI) fell below 7% to 6.9%, according to statistics agency StatsSA.
However, food inflation increased to its highest level since May 2008 to 13.4%. This was more than double the upper limit of the central bank’s target.
The February Household Affordability Index by the Pietermaritzburg Economic Justice & Dignity group revealed that the average cost of the household food basket was R4 928.34. This was up R10.91 (0.2%) from R4 917.42 in January 2023 and R572.64 (13.1%) from R4 355.70 in February 2022.
"Although the Reserve Bank's Monetary Policy Committee (MPC) will likely be comforted by the easing headline inflation and steady core CPI inflation, we believe it will be worried about the implication of rising food inflation on wage settlements.
“Therefore, rising food inflation and elevated inflation expectations could be important drivers of upward pressure on wage inflation," investment analyst at Anchor Capital Casey Delport explained.
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Inflation is high not only in South Africa but around the world, and this has thrown global markets in a tailspin as they try to make head or tail about where the end is for interest rate hikes.
The US federal open market committee (FOMC) is expected to hike rates by 25 basis points after the chair of the Federal Reserve Jerome Powell said they would continue hiking rates until the inflation rate was down to 2% from the current 6%. Globally, inflation is expected to average 6.5% in 2023.
In an interview, Sasfin’s David Shapiro explains the volatility of global markets and the reason behind the selloff after news about the biggest bank collapse since the financial crisis in 2007/08. The failure of the Silicon Valley Bank fuelled already existing jitters about high inflation. He said:
Chief economist at Investec Annabel Bishop stated that the Reserve Bank was likely to follow in the direction of the US Federal: "The Reserve Bank is likely to follow the Fed’s interest rate decision of next week Thursday, likely also hiking by 25 basis points or leaving interest rates flat on March 30 if the FOMC does. Although a 50 basis points hike in the repo rate would strengthen the rand."
Rand weakness is behind the expected hike in the petrol price at the start of April. So far, a 30 cents per litre increase is forecast. This could change as we edge closer to the end of March.
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Bishop added: "Indeed, over the course of this year, the rand’s depreciation from R17 to the US dollar to R18.35 recently has contributed around a third to the rise in petrol prices and so higher transport costs in the CPI.
"This has maintained uan pward pressure on CPI inflation from this source, although overall the oil price is lower to date this year, averaging $94.45 per barrel, compared to the same period last year at $83.74 per barrel," she said.