SA interest rates expected to remain stable in spite of a surge in inflation

StatsSA shows that the annual consumer price index accelerated to 5.2% in May from 4.4% in April

INTEREST rates are expected to remain contained this year despite consumer prices peaking to a 30-month high in May from a very low base a year ago.

Statistics South Africa (StatsSA) said yesterday that the annual consumer price index (CPI) accelerated to 5.2 percent in May year-on-year from 4.4 percent in April.

The print was the highest inflation rate since November 2018, driven up by transport, food and non-alcoholic beverages. StatsSA said transport prices increased by 15.3 percent while food inflation increased for the third straight month in May.

Economists said yesterday that the upswing should be the peak for headline inflation, which was expected to end 2021 at 4 percent.

Anchor Capital’s Casey Delport said the CPI print came in as expected as the annual change was off the very low base recorded in May 2020 when fuel prices were low.

“Overall, this latest print affirms the idea that inflation will prove transitory,” Delport said.

The inflation rose above the 4.5 percent midpoint of the SA Reserve Bank (SARB) monetary policy target range of 3 to 6 percent.

Last month SARB left rates unchanged at 3.5 percent as the 2021 inflation was now forecast to moderate slightly lower.

The bank is expected to begin hiking rates later this year as its Quarterly Projection Model indicates rate hikes of 25 basis points in each of the second and fourth quarters. This implies a repo rate of around 4 percent by end 2021, with a further increase to 5 percent by the end of 2022.

Nedbank’s senior economist Nicky Weimar said they expected SARB to begin hiking rates some time later this year. “We forecast a 25 basis points rise in the final quarter, followed by further 75 basis points spread out over the subsequent three meetings,” Weimar said.

There were notable price increases in the “oils and fats” sub-category where prices rose for five successive months, with canola oil rising sharply by 30.3 percent.

Analysts, however, said they expected inflation to trend downward henceforth, even with July’s high municipal rate increases, though food inflation would provide upward pressure to the headline figure.

FNB economist Koketso Mano said risks to the outlook would come from a weaker rand that could drive fuel inflation higher.

“Other supply-side risks emanate from global raw material shortages, but the extent to which these will be passed on to consumers is likely to be limited,” Mano said.

Fuel prices accelerated for the fifth straight month in May, rising 37.4 percent year-on-year as the petrol price recovered to R17.23 per litre after falling to R12.22 per litre during the comparable period last year.

Momentum Investments economist Johann van Tonder said it was possible that the SARB would start turning hawkish and vote for a 25 basis point increase in rates in one or more of the next three meetings this year.

“However, they are likely to first ascertain whether the current pace of increases in commodity prices will persist, whether strong second-round inflation takes hold and for base effects to work its way out of the system,” he said.

“Within this context, the first increase in the repo rate is expected in the first half of 2022.”