Price shock may spur biggest SA rate hike since 2002

Read: Fed hikes rates 75 basis points, intensifying inflation fight

What Bloomberg Economics Says…

“The breach together with the outsized Fed hike earlier this month and significant rand weakening since reinforces our view that the outcome for the upcoming July meeting is a choice between a 50bps and 75bps increase. The risks toward the latter have increased in our view.” — Boingotlo Gasealahwe, Africa Economist

The Reserve Bank, which prefers to anchor inflation expectations close to the midpoint of its 3% to 6% target range, has raised the key rate by a cumulative 125 basis points since November and signalled even higher borrowing costs ahead. In May, the implied policy rate path of its quarterly projection model, which the monetary policy committee uses as a guide, indicated its key rate will be at 5.3% by year-end, compared with a previous forecast of 5.06%.

The rate of price growth was stoked by high food and gasoline costs, even as the government temporarily reduced a fuel levy to contain increases in the retail price of petrol and wholesale cost of diesel. The measure is likely to have delayed the peak in inflation.

“Until now, there was a belief that although inflation in South Africa was rising, unlike the rest of the world, it was not seeing pressures that it took it way beyond ‘normal’ inflation ranges,” said Razia Khan, head of research for Africa and the Middle East at Standard Chartered Bank. “The shock of a single CPI print now calls into question that assumption. Market expectations of only a narrow breach of the inflation target will be reset – and the South African Reserve Bank, with its anti-inflation credentials never in question, will react accordingly.”

The central bank is concerned about rising imported inflation due to mounting global price pressures, Governor Lesetja Kganyago told an investment conference on Tuesday.