Investec chief economist Annabel Bishop.
Image: Supplied
As South Africa approaches the Monetary Policy Committee (MPC) meeting at the end of May, the air is thick with uncertainty regarding the country’s economic trajectory.
The outcome hinges not only on the expected release of April’s Consumer Price Index (CPI) data, a crucial indicator for policymakers, but also on the evolving geopolitical landscape, particularly the ramifications of the ongoing conflict in the Middle East and its influence on fuel prices.
According to Annabel Bishop, an economist at Investec, the MPC will closely scrutinise the CPI data, which will be unveiled a week prior to their crucial meeting.
Bishop said, "This figure is likely to reflect a substantial increase in fuel prices that results from the escalating tensions in the Middle East. Such developments highlight the critical role that external factors can play in shaping domestic economic policies."
The South African Reserve Bank (Sarb) is expected to monitor any second-round effects, where increases in prices may prompt further inflationary pressures, over the second quarter of 2023 and the remainder of the year, according to Bishop.
"Should significant evidence arise, the Sarb may feel compelled to consider raising interest rates. Currently, the repo rate stands at 6.75%, which economists note is highly restrictive, already exerting downward pressure on economic growth," Bishop said.
The Investec economist said that interest rate hikes could further stifle growth, contributing to an environment where cuts are no longer anticipated.
"The Sarb operates within a tolerance band of between 2.0% and 4.0% year on year around its 3.0% target rate; while this allows for some short-term deviations in CPI inflation from the target, it becomes critical if inflation rates stray from this target permanently," she said.
Historically, central banks tend to overlook initial spikes in oil prices, opting not to prematurely hike rates until it is clear that inflationary trends are deep-rooted.
"Based on this perspective, Investec forecasts that the Sarb may dismiss the anticipated surge in inflation following the oil price movements in April. However, there remains a significant risk, owing to the current hawkish stance of the Sarb, that the committee may opt to tighten the repo rate by 25 basis points instead of exercising caution by waiting for additional data," Bishop said.
This proactive approach, as previously illustrated during the Russian-Ukraine conflict, suggests that the Sarb could choose to act sooner rather than later, potentially instigating an increase during the May meeting rather than waiting until July for a clearer picture of second-round effects.
"On the flip side, the MPC might adopt a more cautious strategy, favouring a ‘wait and see’ approach to ensure that inflationary pressures are indeed persistent before enacting further rate changes," Bishop added.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education said earlier this week that the MPC of the Reserve Bank has already forecasted that the inflation rate for South Africa is expected to quickly increase from 3,1% in March to 5,0% by the second part of the year.
"Under such a scenario, a 50-basis point increase in interest rates was envisaged," Harmse said.
Meanwhile, last week,Sarb Governor Lesetja Kganyago cautioned that interest rate decisions remain finely balanced as policymakers confront rising inflation risks triggered by global supply shocks, while striving to protect the country’s new 3% inflation target.
Kganyago made it clear that while South Africa entered the current crisis from a position of relative strength, the path for monetary policy has become increasingly uncertain.
As the May MPC meeting draws near, businesses, consumers, and market analysts will be keenly awaiting the Sarb’s next steps, knowing that these decisions will have far-reaching implications for the South African economy and could amplify or mitigate the impact of rising inflation in the months to come.
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