South Africa Inflation Surge Unlikely to Bring Forward Rate Hike

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The rise in South Africa’s inflation rate to a 30-month high is unlikely to bring forward an interest-rate hike as the central bank had forecast a second-quarter spike in price growth.

Consumer prices rose 5.2% in May from a year earlier, compared with 4.4% in April, Pretoria-based Statistics South Africa said Wednesday in a statement on its website. That matched the median of 15 economists’ estimates and was above the 4.5% midpoint of the central bank’s target range for the first time in 15 months.

The Reserve Bank’s quarterly projection model in May showed that inflation would breach 4.5% -- where the monetary policy committee prefers to anchor price growth -- in the second quarter and again in the fourth. The model also indicated a 25 basis-point increase in its benchmark rate in each of those two quarters.

What Bloomberg Economics Says

“The still benign inflation outlook supports our expectation that the central bank will leave rates unchanged through 2021, although a better-than-expected recovery may prompt increases as early as the fourth quarter.”

--Boingotlo Gasealahwe, Africa economist

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Federal Reserve

Forward-rate agreements, used to speculate on borrowing costs, dipped on Wednesday, suggesting that traders aren’t adding to rate-hike bets and see the central bank only raising borrowing costs by the fourth quarter. The rand traded 0.7% stronger at 14.1707 per dollar by 12:35 p.m. in Johannesburg.

Traders watching South African inflation numbers would also have been reassured by Federal Reserve Chair Jerome Powell’s comments on Tuesday that price increases seen in the U.S. economy recently are bigger-than-expected, but will likely wane. As a result, the Fed would be patient in waiting to lift borrowing costs, he said.

The South African central bank cut the repurchase rate by 300 basis points from January to July last year to buffer the economy against the global fallout from the Covid-19 pandemic and the impact of local lockdown restrictions. Since the start of 2021, none of the five MPC members has voted for further easing and the panel’s message has been that the next move will be up, although the timing is still uncertain.

Of the 13 economists surveyed by Bloomberg, only four expect the key rate to increase in the fourth quarter, with the majority projecting hikes from the first quarter of 2022.

South Africa Inflation Surge Unlikely to Bring Forward Rate Hike

The uptick in inflation will likely see the central bank revise its price-growth forecasts slightly upward at its next meeting in July, but it’s still expected to keep interest rates unchanged at the current level in the coming months, Elize Kruger, an independent economist, said in an emailed note.

Governor Lesetja Kganyago said at an investment conference last week that if the MPC sees a sustained deviation of inflation from the target’s midpoint, it will step in to bring price growth under control.

©2021 Bloomberg L.P.

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