Ina Opperman
Business Journalist
4 minute read
21 Jun 2022
9:17 am

Inflation in SA: Will it breach upper limit of the Sarb target?

Ina Opperman

Expectations are that the inflation rate for May will be more than the central bank’s inflation threshold of 6,1%.

Image: iStock

Consumers are waiting with bated breath for the announcement of the inflation rate for May to see if it breaches the threshold of the South African Reserve Bank (Sarb) to see if the central bank will follow the US in raising the repo rate by 75 basis points.

Statistics SA will announce the inflation rate for May on Wednesday. According to the Bureau of Economic Research (BER) at Stellenbosch University, it expects inflation to accelerate to 6.1% in May in line with the consensus forecast after it remained unchanged at 5.9% year-on-year in April.

“This will be the first time since March 2017 that inflation tops the upper limit of the South African Reserve Bank’s inflation target range, although the May print is still unlikely to be the peak,” the BER says.

ALSO READ: No runaway inflation just yet, but repo rate likely to increase

Domestic trade data

Domestic trade data for April provided insight on consumer spending at the start of the second quarter of 2022 before the multiple shocks, including the devastating floods in KwaZulu-Natal and recurring nationwide stage 4 load shedding hit the country.

In April, real retail trade sales rose by a much-better-than-expected 3.4% y-o-y in April, while six out of seven retail categories contributed positively to growth. The greatest contributors were general dealers and textiles, clothing, footwear and leather goods retailers.

However, hardware, paint and glass sales contracted by 8.3%, the tenth consecutive month of annual contractions for the hardware category, signalling the end of the Covid home improvement boom.

Real wholesale trade sales shrank by 5% in April after expanding by 2.6% in March. This decrease exceeded the disruptions from the July 2021 looting spree.

The BER says wholesale trade was likely most affected by the April disruptions and should rebound in May, but rising inflation is set to weigh on volume growth for all domestic trade categories going forward.

READ: Inflation on the rise, but not expected to go too far beyond 6%

The global inflation picture

Globally, the key economic event over the past week was the interest rate hike by the US Federal Reserve (Fed), which was much higher than expected. Local financial markets were not spared from the sharp swings it caused, with the rand exchange rate depreciating past R16/$ mid-week.

The Swiss central bank also joined the fight against inflation by unexpectedly hiking its interest rate by 50 basis points last week. Other countries where the central banks increased rates are Brazil (50 basis points) and the UK (25 basis points).

The Bank of Japan (BoJ) and People’s Bank of China increasingly stand out as central banks that have, as yet not started to normalise monetary policy, the BER says. More than 50 central banks have now increased their policy interest rate by 50 basis points or more in one go this year.

“It is becoming increasingly clear that, in many cases, central banks are prepared to accept weaker near-term real GDP growth outcomes if that is what it takes to get decades-high inflation under control.

What global bank moves mean for Sarb repo rate

The BER says the more hawkish tilt by global central banks, but perhaps more importantly, the accompanied weaker rand exchange rate could sway the Sarb to again increase the local repo rate by 50 basis points in July.

However, the Fed and other central banks are not the only driver behind concerns about the health of the global economy. The BER believes it is becoming clearer that China intends to stick to its zero Covid-policy of travel restrictions and city-wide lockdowns heading into next year.

“This comes not only at a direct cost to the Chinese economy, but intermittent lockdowns in China send ripple effects through global supply chains. Looking at the latest data, Chinese industrial production data for May was stronger than expected, but the consumer remains weak,” the BER says.

The European economy also received another blow when Russia decreased supplies of natural gas even further after the leaders of Germany, France and Italy visited Ukraine in support of the country’s bid to become part of the European Union (EU).

In Germany, consumers and companies are requested to cut back on gas usage and the government is restarting coal-fired power plants, while gas prices surged even higher. However, the one-month future Brent crude oil price declined by more than 7% last week amid concerns about the strength of global demand.

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