Spotlight on Bank’s repo rate stance as inflation rises again

• CPI in September pushes to its highest level since May

Consumer inflation drifted up to its highest level since May in September, and recorded its fifth month out of line with the 4.5% midpoint of the SA Reserve Bank’s target range.

September’s rise to 5% year on year — driven by increases in fuel, food and housing and utilities, according to Stats SA — was in line with expectations.

But it comes as rising energy prices and supply-chain bottlenecks stoke global inflation fear and developed market central banks make more noise about tightening monetary policy sooner rather than later.

SA faces another steep hike in fuel prices in November, which may take them to record highs. With inflation risks mounting, economists expect the Reserve Bank’s monetary policy committee (MPC) to sharpen its hawkish tone, if not outright move to hike rates from the current record low of 3.5%, at its next meeting in November.

Many developed-nation policymakers say that global inflationary pressures are transitory, and that prices will normalise once supply-chain bottlenecks caused by Covid-19 settle. A spike in energy prices, including oil, which breached the $85/barrel mark this week, however, have helped keep price pressures sticky.

Bank of England governor Andrew Bailey warned at the weekend that the UK central bank would act to counter if it saw a risk to medium-term inflation and to medium-term inflation expectations, Reuters reported.

The International Monetary Fund (IMF) said in its latest global financial stability report that “while price pressures continue to be viewed as largely driven by pandemic-related circumstances … concerns about inflation risks have intensified recently in financial markets”.

The IMF warned that “monetary authorities should remain vigilant and — if price pressures turn out to be more persistent than expected — act swiftly to counter any possible unmooring of inflation expectations”.

Independent economist Elize Kruger said before Wednesday’s release that while a higher oil price was expected in 2021 the bigger-than-expected increases were likely to result in mounting concern about second-round effects, and could lead to higher inflation expectations.

“As this becomes a more pressing concern, markets are growing more convinced that monetary policy tightening will be brought forward, however, globally it seems that the economic recovery has started to lose momentum and reducing monetary stimulus could push growth rates even lower,” said Kruger.

Nevertheless, given the MPC’s unanimous decision to keep interest rates unchanged, in September, Kruger expects a split vote, but not a hike, in November.

But the MPC’s tone will be “more hawkish to prepare markets” for a hike in early 2022, said Kruger.

BNP Paribas economist Jeff Schultz is, however, expecting the Bank to move in November.

BNP Paribas has maintained that global inflationary pressures are persistent, rather than transitory, said Shultz.

“The price shock will be sufficient and prolonged enough to raise expectations and eventually wage growth in the global economy,” he said.

There are “more upside risks than downside risks to inflation going into next year”, he said.

“In the context of the very aggressive monetary policy easing that we saw out of the central bank last year we think that the [Bank] is probably going to want to act sooner rather than later to ensure that inflation expectations remain very well anchored at 4.5%,” said Schultz.

The Bank warned in its recent monetary policy review that “delaying the lift-off could see the monetary policy authorities playing catch-up with inflation, potentially destabilising the relatively well-anchored inflation expectations”. Schultz expects hiking to continue into 2022, taking the policy rate to 4.75% by the middle of next year, he said. But he stressed that at these levels, as the Bank has pointed out, interest rates would still be “highly accommodative”.

The market, meanwhile, is pricing in a 25 basis points hike in November.

Bloomberg reports that forward rate agreements, are now fully pricing in a 25 basis-point hike and a 64% chance of a 50points increase. But RMB chief economist Ettienne le Roux, said in a note, that interest-rate traders are focusing on issues such as the rising oil price and higher global inflation, and ignoring that core inflation — or inflation stripped of volatile items such as food and fuel — hit 3.2% year on year in September, “almost no different from six months ago”.

The market’s expectations for a hike are “difficult to square with signs of persistent weak underlying inflationary pressures domestically and an economic recovery that is losing momentum,” said Le Roux. If the MPC opts to raise the repo rate by 25 basis points on November 18 it would probably be on the basis that sharply higher food and petrol prices have increased the risk of a notable deterioration in inflation expectations in the period ahead, argued le Roux.

“Alternatively, a decision to act as early as November could also reflect a tactical move which is judged to be small enough not to unduly damage the real economy, while at the same time also serving to reaffirm the Bank’s inflation-fighting credibility,” he said.

MARKETS ARE GROWING MORE CONVINCED THAT MONETARY POLICY TIGHTENING WILL BE BROUGHT FORWARD