Bad to worse for interest rates in South Africa
South Africa’s latest inflation print for June came in higher than expected, not only making an interest rate hike more likely this week, but a bigger hike of 50 basis points is also now on the cards.
According to Stats SA’s latest CPI report, inflation in the country spiked to 5.0%. This was higher than economists’ expectations of around 4.7%.
While a rise in inflation was expected, projections were lower after the inflation print in May surprised on the downside, coming in cooler than anticipated.
However, the massive increases in fuel prices since the onset of the United States’ war with Iran, alongside sharp hikes in electricity and administered prices, pushed costs higher.
According to Investec Chief Economist Annabel Bishop, CPI inflation for high-income earners was especially egregious, jumping to 5.5% y/y in June.
But virtually all other income/expenditure bands saw inflation rise to above 3.0% y/y as higher inflation has become broad-based.
This means that inflation is sitting above the South African Reserve Bank’s 3% target across the board.
Core inflation, which excludes food, non-alcoholic beverages, fuel and energy prices, also moved higher, now sitting at 4.1% y/y from 3.8% y/y in May, and 3.6% y/y in April.
This puts core cost outside the SARB’s 3% target with a one-percentage-point flexibility band as well.
Because of this, the SARB’s Monetary Policy Committee (MPC) is now very likely to hike interest rates this week, when governor Lesetja Kganyago makes the announcement on Thursday (23 July).
Economists were split on whether the SARB would hold rates or hike rates by 25 basis points this week, with most already leaning towards the hike.
However, Bishop said that the reignited war in Iran—which has pushed global oil prices higher once again—means that inflationary pressure may continue.
Furthermore, despite petrol prices dropping by R1.96 per litre in July, the annual electricity price increases that came into effect for municipal customers this month will counteract this.
And the petrol price cut indicated for August of close to R3.00/litre at the start of the month has reduced to only 67c/litre.
These conditions have put a 50-basis-point cut on the menu for the July meeting.
“The MPC discussed a 50bp lift at its last meeting in May, and this will likely be back on the table as the SARB seeks to contain inflation expectations,” Bishop said.
She noted that inflation expectations have already jumped, and the latest Stats SA print shows that CPI is far beyond the upper tolerance band of 4.0% y/y.
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