Hike rates

[TOP STORY] Sarb could raise rates by at least 1% in the next two meetings

SIMON BROWN: I chat with Dr. Chris Harmse, an economist at CH Economics. Chris, I appreciate the time. Inflation go out [yesterday], down slightly from 7.6%. It’s 7.5%, it’s going in the right direction, but slowly.

CHRIS HARMES: Very slowly, as you would expect because there are still too many cost pressures in the economy. But it is down, from 7.8% to 7.6% to 7.5%. Not every other country in the world can say the same about their inflation rates.

SIMON BROWN: Yes. I would like to talk about some of these other countries in a moment. You talk about cost pressures – I, as a South African, think my petrol is a bit cheaper, but there’s a whole lot more to that. Granted, we’ve seen from some Pick n Pay numbers that food is still under pressure.

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CHRIS HARMES: One hundred percent. Look at the food, because a lot of housewives say, “My inflation isn’t at 7.6 percent.” But if you look at the food basket, it’s increased [by] 12% over one year. So if it increases by 12% per year, food prices will double approximately every seven years. That’s what a lot of people are going through now. In other words, we’re talking about the fact that our retailers are really hurting at this point. It is therefore one of [biggest] contributions.

Food and non-alcoholic beverages contributed two percentage points of the 7.5%. So it’s quite high. The other is of course transportation.

In the basket, we look year after year. You need to look at what you paid for your gas, not last month but what you paid exactly one year ago. It was almost [R18.34/litre for Gauteng 95 ULP]. So that’s an increase of 17.9%. So those two, your food and your fuel prices, will, of course, drive up all the costs of a household. This represents 2.5%. So if you add those two together, it’s already more than 4.5% of the 7.5%.

And then, of course, the biggest is Eskom, electricity prices, which we call our housing utilities. I always say to my students, think about housing utilities, think about what you spend the most [on]because [contributes] the largest weight in the basket of these 25%. You spend on your rent or on your deposit, you spend on your municipal expenses, your electricity, and all your cleaning equipment. Think about it. It’s your biggest expense. Although it only increased by 4.2% over one year, it contributed 1%.

SIMON BROWN: Because of this weight.

CHRIS HARMES: Because of the weight, because of the contribution. So if you add that up, it will give you more than 5.5% of the 7.5% [that] comes only from these three main elements. And that’s what’s in your basket.

SIMON BROWN: Yes. I think the consensus is, everyone agrees, the MPC has a meeting in November [where] rates are rising; maybe even in January. We have the prime rate at 9.75%. What is the wait for the prime to arrive before the MPC stops in the raise?

CHRIS HARMES: Well it seems to us another [rise of] 1%. It all depends, of course, on what happens in the US, as the US inflation rate also moved sideways at 8.3%. It was expected to drop to 8.1%, then suddenly there were stutters in the stock markets. Bond rates also rose.

The problem we now face in South Africa is that it is almost a given that the Fed will raise interest rates another 0.75% in just over a week. So they will do it about two weeks before the MPC meeting. Now if they want to increase that by 0.75 bps I think the MPC will have no choice but to increase by at least 0.5 [basis points]because at this stage, it is not about inflation and what it causes, but about the exchange rate.

SIMON BROWN: Yes. If we go too far behind the curve, money flows into the United States because of the yield.

CHRIS HARMES: Yes. So that’s why. And then it depends on what the Fed is going to do early next year. This will of course guide us. But there are indications that some of these prices will start to come down, particularly in the United States where it seems however that the sharp increase in wages – because they have a wage problem – that unemployment has come down to 3.5%. It’s almost natural unemployment, and they need natural unemployment to be at 4.2%. There was huge wage pressure on their inflation basket. It’s different from [ours].

But now it looks like if you look at the unemployment insurance claims, they have started to go up. This means anyone looking for a job could find a job, and some people are starting to file unemployment insurance claims. The market cannot accommodate [everyone].

This is why there is an indication that US inflation may start to subside before the next meeting.

These are the factors we need to consider [as to] what the MPC will do.

But I think at least 1% more in the next two meetings.

SIMON BROWN: One last quick question. More offshore inflation, UK at 10.1%. We worry about our inflation, not even considering the mini budgets. [UK PM] Liz Truss fired [the chancellor of the exchequer]etc That 10.1% is a horrible figure for a developed economy like the UK.

CHRIS HARMES: Horrible figure… because of geopolitical factors. If you look at them, the increase in their power supply is 14.8%. And if you look at their consumption costs – their housing utilities [not] as big as ours – were [up] 20.2%. It was the soaring prices of electricity, gas and domestic fuels. They therefore feel the effects of the Russian-Ukrainian war much more than we do. This is the effect. In fact, I see reports that they estimate that UK inflation rate could be as high as 15%. So it’s a shock.

SIMON BROWN: Yes. But 15% – I remember when we had [it] actually a bit higher than that of the late 90s.

We will leave it there. Chris Harmse, Economist at CH Economics, I always appreciate ideas.

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