South Africa faces a ‘frightening’ month – but it will get better: Nedbank

 ·24 Jun 2022

After this week’s CPI figures surprised towards the upside, Nedbank now forecasts that South Africa’s inflation is forecast to increase to over 7% in June.

In a research note on Wednesday (22 June), the bank noted that petrol prices rose by more than 10% month-on-month in June. On top of this, June is a heavy survey month, including owners’ equivalent rent, actual rentals, taxi, train, and bus fares, motor vehicle insurance, and domestic workers’ wages.

“Relatively hefty increases are expected in owners’ equivalent rent and actual rentals due to the 50-basis-points hike in interest rates in May, while transport fares are also likely to increase significantly to compensate for the surge in fuel prices.

“June’s headline figure, however frightening, is forecast to be the peak in the inflation cycle. Thereafter, inflation should start to ease off the higher base established in the second half of last year. However, the upside risks remain considerable,” the bank said.

It added that tentative signs of some easing in global oil and food prices emerged over the past two months.

“The Brent crude oil price moderated slightly over the past week, but world supply remains tight, and the lifting of Covid restrictions in China will likely intensify these strains.

“In addition, domestic fuel prices will be lifted by the phasing in of the full fuel levy in July and August. International food prices also eased somewhat over April and May, while global supply chain bottlenecks receded slightly since China relaxed Covid restrictions on Shanghai and other manufacturing and transport hubs.”

Rate hikes 

South Africa’s surprise inflation figures of 6.5% this week, alongside continued interest rate hikes in the US, point to a 75 basis point interest rate hike in July, says BNP Paribas senior economist Jeff Schultz.

“We have raised our forecasts for near-term rate hikes by the South African Reserve Bank – we now expect 75bp hikes at the July and September MPC meetings, up from our previous forecast of 50bp moves and well above the consensus expectation,” Schultz said in a research note on Friday (24 June).

“In addition, we have raised our forecast of the SARB’s terminal rate by 50bp to 7% as inflation now looks set to be higher for longer, and is unlikely to fall back to the SARB’s 4.5% target midpoint before 2024.”

With inflation seen as the main threat to the economy, BNP Paribas forecast that most members of the Reserve Bank’s monetary policy committee are likely to favour raising rates to a neutral real level as quickly as possible to prevent a further rise in inflation expectations.

The bank now forecasts:

  • A 75bps hike from the SARB in July;
  • A further 75bps hike in the September meeting;
  • A 50bps hike in November;
  • A 25bps hike in January 2023.

The Standard Bank group has also revised its interest rate forecasts for 2022, with the bank now expecting more hikes as inflation continues to bite.

“Since reporting in March 2022, the global macro-economic outlook has deteriorated. Growth has slowed, inflation has risen, and uncertainty has increased. Key drivers include the ongoing conflict in Ukraine, the strict lockdowns in China, and persistent global supply chain disruptions,” the bank said in a trading statement on 14 June.

“In March 2022, Standard Bank Research expected interest rates in South Africa to increase by 100 basis points for the full year. This has been revised up to 175 basis points,” it said.

Economists were largely surprised by inflation data published by Statistics South Africa this week, with forecasts predicting inflation to reach the Reserve Bank’s ceiling of 6%. However, actual inflation came in at 6.5%, and there are now concerns that this could creep towards the 7% level as the war in Ukraine shows no signs of slowing.

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