Interest rates in South Africa could rise by a further 1 percent to end the year at 6.5 percent per annum after inflation surged to another record high, though it has likely peaked.
Data from Statistics South Africa (StatsSA) yesterday showed that the annual headline consumer inflation accelerated more than expected to another 13-year high.
StatsSA said inflation surged to 7.8 percent in July, from 7.4 percent in June, amid an unrelentless rise in fuel and food prices, as well as the annual increase in municipal service charges implemented in July.
This inflation print was the highest since May 2009, and above market expectations of 7.7 percent, also quickening for a third consecutive month above the SA Reserve Bank (SARB) target range of 3-6 percent.
The SARB has been ahead of the curve by increasing rates before inflation rose above the top end of the band, but this latest inflation print would suggest that the hiking cycle is not over yet.
Last month, the SARB’s Monetary Policy Committee (MPC) increased interest rates for a fifth time in a row, hiking by 75 basis points to 5.5 percent as the risks to the inflation outlook were assessed to the upside.
SARB Governor Lesetja Kganyago said headline inflation was expected to remain above the MPC’s target range until the second quarter of 2023, after the bank revised its forecast higher from 5.9 percent to 6.5 percent for 2022.
Kganyago indicated that monetary policy decisions would continue to be data dependent and sensitive to the balance of risks to the outlook.
Anchor Capital investment analyst Casey Delport yesterday said the second-round effects starting to pull through the greater inflation basket was an issue that remained a prime concern for the SARB.
Delport also said the SARB would also be concerned about the acceleration in wage settlements, and it importantly still regarded monetary policy as very accommodative based on the forward-looking real repo rate.
“Consequently, we forecast another 100 basis points of interest rate hikes over the remaining two SARB MPC meetings for this year,” Delport said.
The expectation of yet another interest rate hike dwindled sentiment in the markets yesterday, with the rand weakening to around R17.06 to the dollar at noon.
The markets are pricing in another rate hike in the US after several Federal Reserve officials signalled support to prioritise controlling inflation over growth and continue hiking rates.
StatsSA said that transport; food and non-alcoholic beverages, and housing and utilities continued to place upward pressure on the annual inflation rate.
Electricity tariffs also increased on average by 7.5 percent, equivalent to the benchmark approved by the national energy regulator, as municipalities increase service charges in July every year.
Annualised core inflation, which excludes food, non-alcoholic beverages, fuel, and energy prices, also surpassed expectations, rising to a new record high of 4.6 percent in July, from 4.4 percent in June.
Investec chief economist Annabel Bishop said that while the third quarter was expected to see inflationary price pressures peak, the broadening of the price inflation base had proved stronger than expected.
Bishop said this also showed space for the SARB to increase interest rates further in order to have a quelling effect on demand, and so reduce consumers’ appetite for higher priced goods.
“As such, at least a 50 basis points hike is likely in the SARB’s repo rate next month,” Bishop said.
“The MPC will also be led by the actions of US monetary policy authorities, which could hike by up to 75 basis points in September, but may only move by 50 basis points on evidence of slowing demand, along with US inflation peaking.”
The JSE All Share Index also dipped below the 70 000 index points mark in the afternoon investors were balancing signs the US economy was weakening.
BUSINESS REPORT