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- SA ex-ante real policy rate
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- SARB MPC: Repo unchanged but still hawkish
- Bonds, the monetary surprise and fiscal dominance
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Inflation expectations a concern
It appears as if inflation expectations have recently become more inelastic than before and may well remain elevated for longer. There is a further risk that expectations remain more inelastic than before as the country experiences weaker trade integration and rising public debt. On the back of a weaker rand, higher country risk and elevated inflation outcomes and inflation expectations, SARB is expected to hike by 50 basis points (bps) this week. The bias remains for further hikes at future meetings.
Business inflation expectations have accelerated well above analysts’
Anecdotal evidence in the economy, amid a worsening electricity crisis, suggests businesses are experiencing mounting cost pressures. Inflation expectations, as surveyed by the BER, have shown that business inflation expectations are well above analyst forecasts, and this differential is currently at a 13-year high. The former may be more relevant for actual inflation at this stage, given that businesses (are price setters and) could incorporate this higher cost into prices.
Sensitivity of inflation expectations to inflation shocks over time
Following the adoption of inflation targeting in South Africa (SA) in the early 2000s, inflation expectations in SA have become less sensitive to macro shocks (and more anchored around the target band). Our own analysis suggests that by 2020, this sensitivity has fallen 10-fold. However, our findings also suggest that in the post-pandemic period, the sensitivity of inflation expectations to macro shocks may have doubled relative to the pre-pandemic period.
SARB likely to remain hawkish and hike by 50 bps this week
Since the March MPC meeting, inflation has surprised to the upside, the USDZAR is 8,7% weaker and the oil price is up 5% in rand terms, while global food prices have begun to tick up. SA’s real rate differential to the US’s remains uncompetitive – given rising country risk, the one-year-ahead real rate differential to the US remains too low to attract or even sustain foreign capital flows to SA. All of the above point to a SARB that remains hawkish in spite of weaker economic growth, with the potential to hike further in July.
We revise our CPI forecast higher, due to a weaker rand
We now revise our inflation forecast up, to 6,4% this year, but still believe there are upside risks to this estimate. And, while we expect inflation to fall to 4,9% in the following two years, the risks to these estimates as well, remain to the upside. With our updated inflation estimates, we now see inflation falling marginally below the 6% upper target band only in August (from June previously). For April 2023, we expect a marginal improvement in headline inflation to 6,9% yoy (from 7,1% in March).