Following an uptick in headline inflation, economists at Nedbank say this has sealed the deal on another interest rate hike in March.
The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) will be meeting next week to discuss the path forward for interest rates in South Africa. Governor Lesetja Kganyago will make an announcement on Thursday (30 March).
The country has been on a hike cycle since November 2021, and has seen interest rates hiked by a cumulative 375 basis points over the period.
According to Nedbank, a 25 basis point hike is now all but guaranteed in March.
With the prime lending rate currently at 10.75%, this would take it up to 11.00%.
“In our opinion, today’s inflation numbers seal the deal on another 25-basis-point rate hike next week. The MPC will be concerned by the continued acceleration in food prices, which appears to reflect the adverse impact of load-shedding on production costs.
“The MPC will also be alarmed by the acceleration in core and services inflation, which suggest broadening price pressures,” the group said.
This is off the back of the inflation figures published by Stats SA on Wednesday (22 March), where prices showed a slight uptick in February 2023.
Headline inflation grew from 6.9% in January to 7.0% in March, while core inflation saw a bigger jump, from 4.9% to 5.2%.
Inflation was largely driven by food and non-alcoholic beverages, which saw inflation climb to 13.6% from 13.4% in January – the highest levels since 2009.
“Food prices were to blame, jumping to 14% year on year,” Nedbank said.
“The continued rise amid sharply lower global food prices and some improvement in local production due to favourable weather conditions suggest that cost pressures may be forcing local producers, wholesalers and retailers to push up prices to restore profit margins.”
Within the food category, upward pressure came from ‘milk, eggs and cheese’, ‘vegetables’, ‘fruits’, ‘sugar, sweets and deserts’ and meat, which recorded double-digit price accelerations. Prices of bread and cereals (20.5% from 21.8%) and oils and fats (16.7% from 18.5%) also remained elevated, but the rates slowed down slightly.
Nedbank said that core inflation is also a key concern, having surprised to the upside. At 5.2% – the highest since February 2017 – the numbers came in higher than the expected 5.0%.
Despite the rise in inflation, Nedbank said that prices are still likely to stabilise throughout 2023, and that this would likely allow for the SARB to cut rates at the end of the year.
“Most of drag will stem from fuel prices, which will benefit from lower Brent crude prices, which will be dragged down by slower global demand, particularly consumer spending in the major economies.
“Food inflation remains sticky but is probably near its peak and should also begin trending down during the second quarter, reflecting the lagged effect of the moderation in global food prices and favourable weather conditions,” it said.
However, risks to the inflation outlook remain to the upside due to rising input costs – including the cost of generating electricity from diesel amid persistent load-shedding, unpredictable weather patterns and a vulnerable rand.
The rand remains under pressure from volatile global risk sentiment. Domestic factors such as power shortages and political noises ahead of the elections next year will also weigh negatively on the local currency, the finance group said.
“While the upside risks remain considerable, we still expect inflation dip below 5% by the end of the year as the economy slows down to a crawl. At this stage, we see the first cut in the cycle at the November meeting,” it said.-bustech
