BER survey shows higher inflation expectations in the first quarter

SA inflation expectations rose in the first quarter, the Bureau for Economic Research (BER) said on Thursday after surveying business people, analysts, labour unions and households.

Average inflation expectations for 2023 increased to 6.3% in the first quarter, from 6.1% in the fourth quarter.

The survey potentially complicates the job of the Reserve Bank, whose monetary policy committee (MPC) prefers to anchor inflation expectations at the 4.5% midpoint of its target range. The results of the survey are one of many factors that the MPC uses to decide on the interest rate.

The respondents forecast inflation will average 5.8% in 2024 before subsiding to 5.5% in 2025. However, average five-year inflation expectations remained unchanged at 5.5%.

Since the MPC’s last sitting in January, global financial markets have been highly volatile, mainly because of uncertainty about the trajectory of inflation and policy rates, particularly in the developed markets where consumer prices are coming down at a slower rate than initially anticipated.

SA as an emerging market has borne the brunt of volatility through the weaker rand exchange rate as the dollar strengthened and commodity prices weakened.

Market expectations of future interest rates in the US have swung widely over the past week since the collapse of Silicon Valley Bank (SBV). The markets now expect the US Federal Reserve to potentially pause in its hiking cycle or even cut rates in the months ahead following the SBV incident, which threw global markets into a tailspin.

Oil prices have retreated significantly, with Brent crude now trading at its weakest level since September 2021, boding well for the outlook on global inflation.

The MPC has previously listed oil prices as one of the key risks to inflation, which it expects to average 5.4% in 2023 before easing to 4.8% in 2024.

The MPC has delivered 375 basis points (bps) of tightening since November 2021, with January’s 25 bps move — the smallest increase in five meetings — taking it closer to ending the hiking cycle. The benchmark repurchase rate stands at 7.25%.

Forward-rate agreements used to speculate on borrowing costs show traders are now pricing in a 56% chance of a 25 bps increase in the key rate on March 30.

That has declined in line with expectations of slower tightening by developed market central banks, including the Federal Reserve, after the collapse of US lender SBV and stress in Credit Suisse Group. 

The inflation expectations survey by BER was conducted between February and March after Stats SA showed growth in food prices increased at the fastest pace in almost 14 years in January

The survey respondents on average expect economic growth to be 1% in 2023, which is half the rate they expected a quarter earlier. They expect growth will accelerate slightly to 1.5% in 2024.

With Bloomberg

mahlangua@businesslive.co.za