Ina Opperman

By Ina Opperman

Business Journalist


What will increasing inflation mean for interest rates?

The inflation rate increased substantially in September and will put more pressure on the Reserve Bank to hike rates.


Inflation increased to 5.4% in September from 4.8% in August, moving further away from the midpoint of the Reserve Bank’s target range, which has consumers worried that interest rates will increase again in November.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) meets every second month to determine the repo rate and influence the level of inflation. National Treasury sets the inflation target in cooperation with the Sarb. Inflation targeting aims to maintain consumer price inflation between 3% and 6%.

Economic research group, Oxford Economics Africa, says the acceleration in headline inflation raises the prospects of further tightening by the Sarb.

“With monetary policy considered restrictive, it is going to be a tight call. The Sarb is not expected to cut rates anytime soon as inflation moves further away from the midpoint of the bank’s target range.”

Jee-A van der Linde, senior economist for the group says the hawkish Sarb must now carefully ponder South Africa’s monetary policy path: either pursuing a “Table Mountain” strategy of keeping rates high for longer, or a “Matterhorn” approach of further tightening followed by rapid easing.

“Although we have noted previously that further interest rate increases cannot be ruled out for the upcoming MPC meetings, we believe that a higher-for-longer approach is appropriate. The economy is experiencing cost-push inflation and with monetary policy still restrictive, the lagged impact of a 25 basis points increase is unlikely to quell price pressures but the Sarb might feel compelled to tighten policy further given how much the US Fed has jacked interest rates.”

Adriaan Pask, CIO at PSG Wealth, says the latest inflation rate supports the view that the Sarb could keep the repo rate steady. However, PSG will keep an eye on the impact of fluctuations in inflation and interest rates on shares exposed to substantial discount-rate risk over this period and continue to adjust our products accordingly.

ALSO READ: Inflation spikes to 5.4% amid soaring fuel and food costs

September inflation makes a hike more likely

Luigi Marinus, portfolio manager at PPS Investments, points out that September was the fourth consecutive month that inflation remained within the 3%-6% target band.

“The September inflation rate makes the likelihood of a rate increase even more likely, though inflation is within the target band, as the inflation trajectory appears to be increasing.

“The PPS funds maintained an overweight exposure to cash for most of the year and continued to benefit from increasing interest rates.”

The Nedbank Group Economic Unit predicts that inflation will probably rise slightly in the coming months due to higher transport costs resulting from fuel prices.

“The price of Brent crude oil has been rising for the past three months, breaching the $90 per barrel level in September after leading producers, Saudi Arabia and Russia, committed to cutting production by 1 million and 300 000 barrels per day, respectively, until the end of the year.

“Meanwhile, the conflict between Israel and Palestine has escalated concerns about potential disruptions to oil production and supply lines in the Middle East. At the same time, the rand remains under pressure, hurt by fears that US interest rates could remain higher for longer and growing concerns about SA’s deteriorating fiscal position.”

The group also believes that food inflation will moderate further off a high base, lagging lower global prices.

“However, the rate of deceleration will probably be contained by the impact of trade restrictions in some countries, elevated domestic operating costs, the shortage of poultry products due to the outbreak of bird flu and potentially unfavourable weather conditions in the upcoming planting seasons.”

Therefore, the group predicts that despite the expected upturn in inflation, it will remain below the upper end of the target band, hovering between 5% and 5.5% in the final months of the year, averaging 5.9% in 2023.

ALSO READ: Rand weakness and inflation worries: What’s ahead for SA’s repo rate?

MPC will also consider high budget deficit

Prof. Raymond Parsons, economist at the NWU business school, points out that the Sarb’s comprehensive Monetary Policy Review (MPR) confirmed that global and domestic economic trends are likely to keep borrowing costs high for longer, perhaps well into 2024.

“As the MPR has for now taken monetary policy as far as possible into restrictive territory, it is more urgent than ever to implement growth-friendly policies and projects. All eyes will be on the Medium-Term Budget to produce sustainable fiscal outcomes,”he said.

Herman Mashaba, leader of ActionSA said: “The increase in inflation negatively affects all South Africans as it means household goods now cost, on average more than they did previously, but it will also likely lead to an interest rate hike which would increase the cost of credit, negatively affecting millions of over-indebted consumers.” 

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