SA Reserve Bank interest rate expectations for May

The latest consumer price inflation, higher than market expectations, increased the chances of another interest rate increase in May.

Consumer price inflation increased by 7.1% year-on-year in March 2023, up from the 7.0% year-on-year print in the previous month. It was higher than the market’s expectation of 6.9%.

It is the second consecutive increase after inflation rose from 6.9% to 7.0% year-on-year last month. It means that inflation has averaged 7.0% for the year to date.

Inflation will need to moderate for the rest of the year to attain the 6.3% average that the South Bank Reserve Bank forecasted in the recent Monetary Policy Committee (MPC) meeting.

Another concern is that there is more pain to come. Water and electricity inflation presents upward pressure on administered prices in the coming months.

Most SA municipalities have tabled proposed municipal rate increases for 2023/24 in their draft budgets.

These unweighted average increases include property rates (3.75%), water (10.11%), sewerage (7.78%), electricity (18.38%), and refuse removal (6.18%).

South African Reserve Bank (SARB) governor Lesetja Kganyago told Business Day they were surprised by the sticky food inflation.

However, despite the high food inflation, he remains confident that inflation would return to the Reserve Bank’s 3% to 6% target range in the fourth quarter as forecasted.

It raises the question of what the market can expect from next month’s SARB MPC meeting.

Luigi Marinus, portfolio manager at PPS Investments, said there are concerns that the current hiking cycle is more protracted and still needs to have the desired weakening effect on inflation.

“After the surprise 50 basis point hike post the last MPC meeting, this increase in inflation may signal that we have yet to reach the end of the hiking cycle,” he said.

Momentum also said upside surprises in headline inflation suggest an increased risk of additional monetary policy action at the May interest rate-setting meeting.

“Nonetheless, we maintain that on a forward-looking basis, real interest rates have moved into more restrictive territory, potentially capping prospects for significant tightening from here,” Momentum’s Herman van Papendorp said.

PSG Wealth’s Adriaan Pask said the inflation increase saw the FTSE/JSE All Share Index slip nearly 1%. The rand also weakened 0.16% to the US dollar.

“Higher inflation expectations and depreciating currencies continue to reinforce the pressing need for central banks to accelerate the normalisation of their policy rates, tightening global financial conditions,” he said.

Pask expects capital flow and market volatility to remain elevated for emerging market assets and currencies.

The implied policy rate path of the SARB’s quarterly projection model also indicates gradual normalisation through to 2024.

“We remain watchful of the impact of fluctuations in inflation and interest rates on shares exposed to substantial discount-rate risk over this period, and we will continue to adjust our equity portfolios accordingly.”