Another SARB repo hike? The recent 16 months have been nothing short of an economic rollercoaster. As the global economy was recovering from the COVID 19 pandemic, Russia invaded Ukraine in Feb 2021. An event that sent supply shock waves across the globe. This implied that sooner than later world economies would have to contend with cost-push inflation. This is a notorious kind of inflation and history shows that it causes stagflation or prolonged recessions.
By the end of 2021 inflation was raising its head in South Africa. The US declared the inflationary prospects as being transitory. The SARB took a rather pragmatic stance. In Nov 2021 it embarked on a rate hike program. The hike came in at 25 basis points (bp) raising the repo rate from record lows of 3,75% to 4%. The gist of the hiking program was to manage the anticipated second-order effect of supply shocks. As expected, SA has had several significant wage strikes (SARS, Sibanye, Numsa, Private Security sector) in 2022. Inflation numbers for Nov 2021 and Dec 21 tested the upper inflation band of 6%.
Further hikes of 25bp in March and May 2022 ensured that inflation was kept below the 6% upper limit. In contrast, the US’s (the Fed) delayed action saw its inflation soaring to above 8% from April right through to June. The Fed chair admitted that they had underestimated inflation. Despite the 50bp hike that came in from the SARB in May 2022 inflation breached the 6% mark. In June the markets were further shocked when inflation came in at 7,4%. Suffice to say, overall, the SARB has done a decent job in handling inflation as per the demand placed by their mandate.
SARB Rate Hike July 2022: What is keeping inflation on the rise?
Several factors are at play in keeping inflationary pressure high: the war in Europe and a strong US dollar. A strong dollar implies a weak rand meaning there may be short-term demand, externally. Thereby pushing local prices up. Alternatively, the weak rand means high import costs, and this may very well lead to these costs being further passed on (through inflation) to the local consumer who is in a weak position already. On the downside, however, the COVID19 restrictions in could imply weak demand and may very well compensate for the US dollar strength.
There is a pronounced prospect of food shortage given interruptions of grain supplies from Ukraine and Russia. According to the UN, the two countries supply Africa with 44% of its wheat (the price of which has almost doubled since the war). A prolonged conflict may very well exacerbate food inflation. Further to this, given its status as a net importer of oil SA will continue to take high prices, trickling down to the food basket.
Rate hike expectation
The rand is in weak territory trading at R17,15 to the US dollar, inflation is imminent. It is thus, a no-brainer that the SARB’s MPC will raise the repo rate. While the market consensus is by 50bp, there is a precedent whereby the MPC hiked the repo by 100bp in one sitting (2002) it would thus, not be overly surprising should the MPC decide on a 75bp. For SA residents, businesses, and consumers alike, it’s time to leverage export opportunities offered by the weak rand in regions with stable demand.
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