Hike rates

The SA Reserve Bank’s MPC set to raise rates this week…

When the Monetary Policy Committee (MPC) of the Reserve Bank of South Africa (SARB) last met in January, Ukrainian cities were not in ruins and alarm bells were not ringing at all. about the export of grain from the Black Sea and Russian oil. Still, the outlook for inflation was hardly rosy.

“Risks to the inflation outlook are rated on the upside. Global producer and food price inflation continued to rise. surprise higher in recent months and may do so again,” the MPC noted in its January statement.

Global producer prices and food inflation have certainly “continued to surprise higher” since then, not least because of Russian President Vladimir Putin’s invasion of Ukraine.

Brent prices were around $82 a barrel when the MPC met in January and have since climbed to near $130 and remain well above $100. Retail petrol prices in South Africa are now at record highs above R21 per litre. US corn prices have jumped more than 20% since the last MPC meeting.

“Global food prices are poised to continue to climb even after hitting a record high in February, placing the heaviest burden on vulnerable populations while adding headwinds to the global economic recovery,” the official said. International Monetary Fund (IMF) in a press release. blog post Last week.

Food and fuel prices have been the main drivers of inflation in South Africa, where demand pressures remain generally subdued due to extremely high unemployment and the fragility of the economic recovery. The consumer price index (CPI) slowed to 5.7% in January from 5.9% in December, but the combination of rising food and fuel prices from already high levels will keep the boiling inflation. The Sarb’s inflation target range is 3% to 6% and takes into account second-round effects.

Plans must be made for a settlement in Ukraine – and Russian humanitarian reparations

Thus, the inflationary flames ignited by Russia’s invasion of Ukraine should accelerate the tightening cycle that Sarb began in November 2021, when it raised the repo rate by 25 basis points, followed by a hike similar in January which brought it to 4%. Interest rates had hit record highs, offering beleaguered South African consumers and businesses some relief as the economy slumped in the face of Covid-19 lockdown restrictions. This party is now and truly over and the looming hangover could be on the scale of Russian vodka.

The big question is whether the MPC will rise 25 or 50 basis points at the end of its three-day meeting on Thursday, March 24.

Peter Attard Montalto, head of capital markets research at consultancy Intellidex, points out that oil is off recent highs and the rand has held up well against rate hikes in the US and UK. -United.

He notes that the performance of the rand “reinforces the fact that South Africa faces with its decent terms of trade (further supported by the Russia/Ukraine impact on commodity prices) the best possible world in the tightening global liquidity and the risk of shocks, which means that the MPC will only see the need for further slow normalization”.

“Normalization” in this case is central bank jargon for rates rising to “normal” or typically historical levels.

And few Sarb watchers would doubt its commitment to containing inflation, so 50 basis points might not be necessary. he is clearly in a crunch cycle regardless. That said, he’s also performed “pre-emptive” strikes in the past.

Another factor the Sarb will be aware of is the impact that higher rates will have on economic growth, which is expected to slow sharply this year as the base effects that supported the 4.9% recovery in 2021 wear off. fade.

In January, the Sarb predicted 1.7% growth for the South African economy in 2022. IMF Managing Director Kristalina Georgieva said last week that the Ukraine conflict resembled an “earthquake” and that its ripple effects would include slower global growth and faster inflation.

This means slower economic growth for South Africa, which already faces many headwinds. DM/BM