‘Pressures on core inflation are building’

BNP Paribas says the pressures on core inflation are building, which could force the South African Reserve Bank (Sarb) to step up the pace of repo rate hikes from next month.

Meanwhile, Anchor Capital has forecast repo rate hikes of 25 basis points each in May, July and September, which will bring the repo rate to 5% by the end of this year.

“We also acknowledge the risk of a frontloaded 50bp rate hike in May should more concrete signs of second-round domestic price effects emerge,” said Anchor’s fixed-income investment analyst, Casey Delport.

However, BNP Paribas expects the Sarb’s Monetary Policy Committee (MPC) to be more aggressive. It is forecasting hikes of 50bp in May and July, followed by successive 25bp hikes at each meeting thereafter until May next year.

“We don’t believe that current excessive loadshedding will deter the central bank from acting to ensure the anchoring of inflation expectations at its current 4.5% midpoint,” said senior economist Jeff Schultz.

“We therefore maintain our call for an end-2022 repo rate of 5.75%, and a terminal policy rate of 6.5% achieved by mid-2023. By this point, we think that the Sarb will be satisfied that it has normalised rates sufficiently, without hurting the incipient growth recovery, to ensure inflation expectations remain well anchored at its current 4.5% midpoint target.”

Core inflation momentum

Schultz said although March headline CPI came in slightly below consensus at 5.9%, up from 5.7% in February, the trend to note was that core prices rose 3.8% year on year, or 0.8% month on month.

Notable core CPI drivers were owners’ equivalent rent/rentals, which rose by a sharper than expected 2.7% (0.6% m/m – its highest first-quarter jump since 2018). Other meaningful price pressures were also being seen in restaurants and hotels (1.1% m/m), public transport (3.5%), package holidays (1.1%), and maintenance and repairs (0.7%).

Notwithstanding the temporary fuel levy reprieve in April and May, which could see CPI temporarily slow towards 5.8% in the following two months, BNP Paribas expects price pressures to prove more challenging by the middle of the year, Schultz said.

BNP Paribas anticipates a more protracted breach of the Sarb’s upper 6% target range again from June, and headline inflation will struggle to move towards the Sarb’s 4.5% midpoint target until the second half of next year.

‘Unpredictability supports gradual hikes’

Delport said the unpredictability brought about by the war in Ukraine supports gradual rate hikes considering the current economic backdrop and forecasts.

“We doubt that a 50bp rate hike will curb inflation or inflation expectations more than two 25bp rate hikes, while it may weigh on a still-fragile growth recovery that could ultimately be curbed even further depending on how the war unfolds.”

Anchor’s view is that the repo rate will rise to at least 6% over the next two years, although the unpredictability of the war makes it particularly hard to forecast the exact timing of each rate hike.

More hawkish stance

The MPC’s most recent meeting in March “indicates a clear shift towards a generally more hawkish view” of rate hikes, Delport said.

In January, the debate was between no hike (preferred by one MPC member) and a 25bp hike (preferred by four members), whereas in March it was between a 25bp hike (preferred by three members) and a 50bp hike (preferred by two members).

Although it was widely anticipated that the MPC would release a hawkish statement, it was even more hawkish than expected. Delport said this can largely be attributed to a combination of:

  • The Sarb’s elevated 5% average core inflation forecast in 2023;
  • The bank’s expectation that the output gap will now close faster (in response to upward growth forecast revisions); and
  • The sizeable lift in surveyed inflation expectations even ahead of the food and fuel price spikes induced by the war.

Thus, the expected cumulative hikes this year will, to a large extent, depend on the evolution of the war in Ukraine, Delport said. The shorter the war, the quicker the recent fuel and food price spikes should reverse, at least in part.

“The Sarb seems to be leaning towards a reasonably protracted war that is largely inflationary.”

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