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Picture: MARTIN RHODES
Picture: MARTIN RHODES

The Reserve Bank’s monetary policy committee will hold its July meeting next week, just days after US inflation came in at a shock 9.1% for June.

By comparison, SA’s latest 6.5% inflation rate looks quite tame. It looks pretty tame too compared with the inflation rates of most other emerging market countries — not just Turkey at 78% but Chile at 12.5% and Brazil at almost 12%. And while SA’s inflation rate is now above the top of the target range, and well above the 4.5% midpoint that the Reserve Bank targets in practice, it hasn’t strayed nearly as far off target as that of many other countries, it is noted in a recent report from Absa’s economists.

But this is absolutely no cause to be complacent. Some of the factors that have helped to moderate SA’s price pressure could be changing. The committee will be watching those closely, and looking out for any signs of price spiral danger. It is the future, not the past, trajectory of inflation it has to worry about — and respond with its interest rate decision.

One factor has been the rand exchange rate, which had helped to mute inflationary pressure from soaring global oil and food prices — at least to some extent. But the rand’s unexpected strength earlier this year has dissipated in recent months and particularly in recent weeks. That reflects a bunch of negative domestic factors such as load-shedding and the president’s “Farmgate” woes as well as a global flight to the safety of the dollar and away from risky emerging market assets.

The MPC went into its May meeting with the rand at just under R16 to the dollar. This week the currency hit R17.22 to the dollar. That could counteract any declines in the global oil or other prices. The full implications of the weaker rand has yet to feed into inflation and the committee will have to make a call on how that will pan out.

It will be doing so in the knowledge that its own decision on interest rates will affect the rand, and because if it falls too far behind the US Federal Reserve in raising rates, even more capital will flow out of SA and into dollar assets. And while in theory the Bank targets the inflation rate, not the exchange rate, the outlook for the exchange rate is very material for inflation in SA.

Held back

A second factor the committee will be watching is wages, and whether signs of a wage price spiral are emerging in which high wage increases prompt businesses to pass these on in the form of high price increases. When food and fuel prices are driving higher inflation it hits poorer families particularly hard, and trade unions can be expected to demand pay hikes to mitigate this. Until recently, private sector pay increases had been relatively muted, as had those in government. But the pressure is rising, with the likes of 7% hikes at Eskom and steep demands in the auto industry, among others.

A third factor will be whether the retailers that have been absorbing higher input costs by way of lower margins, instead of passing them on to consumers, can or will continue to do so. In a weak economy with weak consumer demand many will have held back. But that may not last for long.

And a fourth will be regulated prices such as electricity and municipal rates and taxes that tend to keep inflation high in SA at the best of times. Electricity tariffs were already going up by more than inflation; load-shedding can only increase the pressure given what Eskom is spending on diesel and losing on sales.

Most of all the committee will be watching inflation expectations — because that reflects the likely behaviour of price setters in the economy that monetary policy tries to influence through interest rates.

With inflation set to climb to 7% or even 8% in coming months, the committee will have to signal strongly that it will act to keep the lid on and prevent SA heading even close to the double digits seen in other countries. That certainly means a 50 basis point hike. It could mean more.

The committee will want to stick with the gradual hiking cycle that has worked for it so far; whether it will be able to do is the question.

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