Global Courant
New data from the Bureau of Economic Research (BER) shows that companies, analysts and unions expect inflation to rise in the second quarter of 2023 – and that wage and wage increases will be smaller.
Inflation expectations of analysts, entrepreneurs and trade unions increased by 0.2 percentage point to an average of 6.5% in 2023.
The group’s new second quarter 2023 inflation expectations survey is used by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) as one of several indicators of interest rate decisions.
A general picture of rising inflation points to a greater likelihood of more rate hikes.
“Between the surveys for the first and second quarters, the annual rate of increase in headline consumer inflation fell from 7% in February 2023 to 6.3% in May,” the BER said.
“Of the three social groups, analysts expect the lowest inflation over all three years, while business people expect the highest. Unions are not far behind companies.”
Year-ahead household inflation expectations rose sharply from 7% in the first quarter to 8.1% in the second quarter – the highest since 2010. Households also expect medium-term inflation to rise from 9.9% to 10.7% in the next quarter. five years.
Survey respondents also lowered their forecasts of salary and wage growth in 2023 and 2024.
“Where they previously expected wages to increase by 5.3% this year, that has been reduced to 5%. A wage growth of 5% is also foreseen for 2024,” reports the BER.
In addition, GDP growth expectations were cut by all three social groups to 0.6% in 2023.
“This is significantly lower than the 1% expected in the first quarter of 2023. For 2024, the average growth forecast is 1.4%, broadly unchanged from the 1.5% before,” the BER said.
Possible interest rate hikes
The MPC will be concerned if inflation expectations rise. This would happen if inflation expectations significantly exceed the desired mid-range of 3% to 6% or if other inflation indicators worsen, the group said.
When inflation expectations rise, this could potentially lead workers to demand higher wages to offset expected higher inflation in the future.
The BER said that if demand remains strong, companies have an opportunity to raise their prices. However, to prevent higher inflation expectations from materializing, the South African Reserve Bank (SARB) may need to raise interest rates.
Analysts have spoken of further rate hikes as the SARB is expected to stick to its tradition of trying to bring inflation back into target range.
Despite the central bank’s attempts to control inflation by raising interest rates, the current inflation rate will persist.
The SARB stated that the recent 50 basis point increase in May 2023 means that monetary policy has only now entered restrictive territory.
Economists across South Africa, including the BER, have subscribed another 25 basis points for the next MPC meeting later this month.
In an interview with Bloomberg TV on July 3, Letsetja Kganyago, the governor of the SARB, said, “There is no doubt that policy will have to stay tight a little longer than it actually is, the market is praising.”
“And the reason is that inflation is more stubborn than we actually thought.”
However, he noted that it was too early to know if the bank would raise interest rates similar to what the US Federal Reserve did in June.
In follow-up interviews, the governor indicated that the overall inflation trend, especially over the lugger period, was positive.
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