Outlook darkens ahead of Bank’s interest rate decision

Annual consumer inflation surprised in October, coming in above market expectations and strengthening the possibility of a higher rate hike on Thursday when the Reserve Bank makes its repo rate announcement.

Stats SA on Wednesday said October inflation quickened to 7.6%, marking the sixth consecutive month in which annual inflation has been above the higher end of the Bank’s 3%-6% target range.

Inflation first breached the upper target in May, at 6.5%. It last broke through in March 2017 when the rate was 6.1%.

Consumer inflation reached a 13-year peak of 7.8% in July. In response, the Bank raised the repo rate by 75 basis points (bps), marking its highest borrowing cost increase in two decades. The decision shocked the market, with only four of 23 economists surveyed by Reuters expecting a 75 bps rise, while the rest expected a 50 bps increase.

Another 75 bps rate hike was implemented in September, taking the repo rate to 6.25% and returning it to its level in January 2020 before the Bank unleashed extraordinary stimulus to keep the economy afloat during the Covid-19 pandemic.

Since the start of the hiking cycle in November last year, interest rates have increased by a cumulative 275 bps.

Economists said the move signalled that the Bank was worried about “considerable risk” still attached to forecasts for average salaries, expectations of future inflation and the weakened rand.

Bank governor Lesetja Kganyago told journalists then that even though the 75 bps hike was the consensus view of the monetary policy committee (MPC) in terms of their take on the balance of risks, two members opted for 100 bps and “prefer that maybe we should be acting faster” to tame rampant and persistent inflation.

Core inflation, which excludes volatile items such as food, nonalcoholic beverages, fuel and energy, increased by 0.3 percentage points to reach 5% in October — its highest level since February 2017.

Investec chief economist Annabel Bishop said the MPC might deliver a 100 bps increase instead of another 75 bps rise given the deterioration in the inflation figures.

Economists at Absa, Nedbank, Oxford Economics and Stanlib expect a 75 bps hike, in line with market expectations.

Absa senior economist Miyelani Maluleke said Wednesday’s consumer price index (CPI) was a hawkish signal.

“As the members of the MPC regularly emphasise, the committee tends to look through the first-round effects of price shocks and focus on the second-round effects of shocks, balancing the need to be data dependent, but also forward looking,” Maluleke said. “More signs from today’s CPI data that price pressures are broadening will be of concern to the MPC.”

Nedbank economist Johannes Khosa said they forecast that the Bank would take “an aggressive stance”, hiking by 75 bps before scaling down to smaller increments of 25 bps in January and March 2023.

“If inflation proves stickier than we expect, as today’s numbers suggest, the MPC is likely to remain hawkish, raising interest rates faster and to a higher peak,” Khosa said.

Stanlib chief economist Kevin Lings said trends in global inflation — with the rate in the UK at 11.1% and in the eurozone at 10.6% — and local risks including increased demands for higher wages, a weaker exchange rate, the potential of a prolonged spike in agricultural and food prices, and upward pressure on administered prices, mean the risk to inflation was still “unfortunately” to the upside.

He said that before Wednesday’s inflation reading, Stanlib had argued that the Reserve Bank would hike rates by 50 bps on Thursday.

“However, the latest inflation reading, especially the increase in core inflation to 5% increases the prospect of the MPC deciding to hike rates by 75 bps.”

Africa economist at Oxford Economics Jee-A van der Linde said: “The MPC has made it clear that it will need to see further evidence of slowing inflation before easing monetary policy. Depending on what happens to domestic inflation over the coming months, what the US Federal Reserve decides in December and how the rand reacts to all of this, we acknowledge the possibility that the repo rate might peak even higher than our current forecast of 7.5%.”

zwanet@businesslive.co.za