Inflation expectations climb before SA rate decision


South African inflation expectations rose for the next two years, affirming predictions that the central bank will prolong its most aggressive rate-hiking cycle in at least two decades.

Average inflation expectations for the year increased to 6.1% in the fourth quarter from 5.9% previously, according to a survey conducted by the Stellenbosch-based Bureau for Economic Research. The rate of price growth for 2024 is now seen climbing to 5.6% from 5.3%, according to participants in the poll of analysts, business people, labor unions and households conducted between November 21 and December 8.

All social groups revised their forecasts upward since the previous survey, the BER said Monday in a statement published on website. Average five-year inflation expectations rose to 5.5% from 5.4%, it said.

The South African Reserve Bank’s monetary policy committee targets price growth in a band of 3% to 6% and prefers to anchor expectations close to the midpoint of that range. The rate of price growth, spurred by the worst global inflation shock in a generation, has breached the target ceiling for seven consecutive months.

The bank lifted borrowing costs by 75 basis points for a third straight meeting to 7% in November, when Governor Lesetja Kganyago affirmed its commitment to taming the “monster of inflation.” The aim of policy is to anchor price-growth expectations more firmly around the target midpoint and to “increase confidence of attaining the inflation target more sustainably over time,” he said at the time.

With inflation predicted to slow and the benchmark interest rate at 7% — higher than the year-end 2025 level that the central bank’s quarterly projection model, which the MPC uses as a guide, suggests it should be — the Reserve Bank is predicted to slow the pace of interest-rate hikes. Forward agreements used to speculate on borrowing costs show traders are fully pricing in a 25 basis-point hike at the MPC meeting scheduled for January 26.

© 2023 Bloomberg

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