Reserve Bank faces difficult choice after higher-than-expected inflation number

January 19, 2022

South Africa’s inflation rate moved closer to the top of the central bank’s target range in December, highlighting the difficult choice between taming price growth and supporting a sluggish economy policy makers will face when deciding on interest rates next week. 

The annual inflation rate rose to a near five-year high of 5.9%, compared with 5.5% in November, Statistics South Africa said Wednesday in a statement on its website. The median of 19 economists’ estimates in a survey was 5.7%. 

The December reading brought the average inflation rate for 2021 to 4.5%, matching the central bank’s estimate published at its November monetary policy committee meeting.

While the South African Reserve Bank officially targets price growth in a band of 3% to 6%, its MPC prefers to anchor expectations close to the midpoint of the range. Inflation, stoked by near record-high fuel prices and rising food costs, has now breached 4.5% for eight consecutive months.

The central bank raised its benchmark interest rate for the first time in three years in November. The implied policy rate path of its quarterly projection model, which the MPC uses as a guide, indicates one 25 basis-point increase in each of the next 12 quarters. Governor Lesetja Kganyago has long maintained that the model is merely a guide and that future decisions will be data dependent.

The Reserve Bank could pause the hiking cycle this month to support an economy reeling from the fallout of a fourth wave of coronavirus infections. Economists predict international travel bans, imposed on South Africa after its discovery of the omicron variant, risk stalling the country’s economic recovery.  

Forward-rate agreements starting in one month, used to speculate on borrowing costs, signal traders are pricing in a full quarter-point increase in the repurchase rate on January 27.-fin24

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