After an increase in headline inflation, economists at Nedbank say this has sealed the deal for another rate hike in March.
The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) will meet next week to discuss the direction for interest rates in South Africa. Governor Lesetja Kganyago will make an announcement Thursday (March 30).
The country has been in a cycle of increases since November 2021 and has seen interest rates rise by a total of 375 basis points over the period.
According to Nedbank, a 25 basis point increase is now virtually guaranteed in March.
With the prime lending rate currently at 10.75%, this would rise to 11.00%.
“In our view, today’s inflation numbers seal the deal for another 25 basis point rate hike next week. The MPC will be concerned about the continued acceleration in food prices, which appears to reflect the negative impact of the divestment on production costs.
The MPC will also be alarmed by the acceleration in core and services inflation, which point to increasing price pressures, the group said.
This comes from the inflation figures published by Stats SA on Wednesday (March 22), where prices rose slightly in February 2023.
Headline inflation rose from 6.9% in January to 7.0% in March, while core inflation took a bigger jump, from 4.9% to 5.2%.
Inflation was largely driven by food and non-alcoholic beverages, where inflation rose from 13.4% in January to 13.6% – the highest level since 2009.
“Food prices were to blame for this and jumped to 14% year-on-year,” Nedbank said.
“The continued rise amid sharply lower global food prices and some improvement in local production due to favorable weather conditions suggests that cost pressures may force local producers, wholesalers and retailers to push up prices to restore profit margins.”
Within the food category, the upward pressure came from ‘milk, eggs and cheese’, ‘vegetables’, ‘fruit’, ‘sugar, sweets and desserts’ and meat, which recorded double-digit price increases. The prices of bread and grains (20.5% of 21.8%) and oils and fats (16.7% of 18.5%) also remained high, but rates fell slightly.
Nedbank said core inflation is also a major concern after a positive surprise. At 5.2% – the highest since February 2017 – the figures came in higher than the expected 5.0%.
Despite the rise in inflation, Nedbank said prices are likely to still stabilize in 2023, and that this would likely allow the SARB to cut rates at the end of the year.
“Most resistance will come from fuel prices, which will benefit from lower Brent crude prices, which will be weighed down by slower global demand, particularly consumer spending in major economies.
“Food inflation remains stubborn, but is likely to be near its peak and should also decline in the second quarter, reflecting the lagged effect of global food price moderation and favorable weather conditions,” the report said.
However, risks to the inflation outlook remain positive due to rising input costs – including the cost of generating electricity from diesel amid ongoing load shedding, unpredictable weather patterns and a fragile edge.
The rand remains under pressure from volatile global risk sentiment. Domestic factors such as power shortages and political noise ahead of next year’s elections will also weigh on the local currency negatively, the financial group said.
“While upside risks remain significant, we still expect inflation to fall below 5% by the end of the year as the economy slows down. At this stage, we will see the first reduction in the cycle at the November meeting,” it said.
Read: Bad news for South Africa as prices rise even higher
