Ferdi Meyer, managing director of the Bureau for Food and Agricultural Policy (BFAP), told Farmer’s Weekly that he expected interest rates to increase by 75 basis points.
He said current inflation rates had been under pressure from rising costs such as the sharp rise in global commodity prices, along with supply chain disruptions, including logistical challenges associated with the COVID-19 pandemic and the Russia-Ukraine conflict, and not rising consumer demand.
“We are sitting with poor economic growth and weak demand, as consumers struggle to make ends meet. The likelihood of a global recession will also have to be taken into consideration if interest rates are pushed too high,” Meyer said.
An interest rate hike was nevertheless needed, and one of the main reasons was to protect the exchange rate of the rand against international currencies.
Meyer explained that interest rate hikes in other countries, and specifically the US, had narrowed the rate differential between South Africa and these countries, rendering South African assets less attractive.
This was reflected in the value of the rand deteriorating from R15,20 on 9 June to over R17 against the US dollar in the week of 18 June.
The weakening of the rand against the US dollar also had a negative impact on the price of imported products such as petroleum and fertiliser, and in effect any stabilisation in international commodity prices.
“Global commodity prices have shown the first signs of stabilisation, and in some cases, prices have started trending downwards.
“However, in terms of food inflation, we will have to keep a close eye on the current heatwaves in the Northern Hemisphere that could have an adverse impact on agricultural production, and consequently commodity prices could start rising again.
“The Russia-Ukraine war also continues to fuel the level of uncertainty in commodity markets, and Ukraine is struggling to find viable export routes for surplus stocks,” he said.
However, if the current crop expectations in the Northern Hemisphere materialised and exports from Ukraine gradually began to increase, he expected agricultural commodity prices to start trending downwards in the medium term.
There was typically a three-month lag between agricultural commodity price movements and that of food inflation.
In terms of fuel prices, the Central Energy Fund reported an over recovery in fuel prices, estimated between 93c/l and 96c/l for petrol and about 103c/l for diesel and illuminating paraffin.
While a lot could still happen before the end of July, the Bureau for Economic Research (BER) expected that the over-recovery could at least neutralise the impact of the removal of government’s 75c/l temporary relief on the fuel levy, on 2 August.
BER, nevertheless, was one of the institutions expecting interest rates to increase by 75 basis points, citing the more aggressive rate hike stance from several central banks since May, accompanied by the surge in the US dollar and weaker rand, as well as an expected significant upward adjustment to the SARB’s inflation forecast.
It also held true that current above inflation wage negotiations could further entrench the trend of higher inflation.
While not its baseline forecast, BER also did not rule out the possibility of interest rates increasing by 100 basis points.
UPDATE: The interest rate increased by 75 basis points on Thursday.