The South African Reserve Bank (SARB) is likely to keep its foot on the hiking pedal in the coming year, with inflation moving sharply higher and the growth outlook well supported for now, says Jeff Schultz, senior economist of BNP Paribas South Africa.
The SARB is likely to deliver a minimum of 25bp hikes at all five remaining meetings this year, Schultz said in a research note on Friday (4 March).
“Should core CPI begin to show evidence of second-round effects, however, we cannot rule out a faster pace of tightening, even though we think the bar for a 50bp hike remains high right now. Data dependence remains key,” he said.
Much of the focus will be on the geopolitical situation globally and Russia’s invasion of Ukraine which remains highly fluid and uncertain, Schultz said. Particular focus will be on global food and oil prices are likely to drive up local inflation, he said.
“We have revised up our non-core CPI estimates, assuming for now that oil prices will remain above $110/barrel (average) over the next three months, with our crude oil assumption feeding our bottom-up inflation model now averaging $100/barrel versus the USD 88/barrel we had assumed previously.
“With the OECD’s FAO global food price index likely to climb sharply higher from already lofty levels and domestic fuel prices set to hit more record highs in the coming months, indirectly pushing up food prices, as the majority of food supplies in the country are transported via road, we have also made upward revisions to our food price estimates.”
BNP Paribas South Africa now expects CPI food to average just shy of 7% in 2022 from its prior estimate of 5.5%.
These two components alone mean that headline CPI now looks set to hit the ceiling of the SARB’s 3-6% target band from as early as March and breach the upper band from April, Schultz said.
“We now forecast headline CPI to average 6% in 2022 (+0.8pp from previously), peaking at 6.5% (average) in Q2, before slowing only modestly to 6.1% in Q3 and 5.5% in Q4 – the latter still well above the SARB’s 4.5% midpoint target.”
“We do, however still see scope for CPI to head back below the target mid-point, but this now only seems likely from Q2 2023, versus our original expectation that inflation would be comfortably back towards the target by late this year.”