Latest Consumer Price Inflation (CPI) Data Increases Chance of Interest Rate Hike in May

The March 2023 CPI data in SA exceeded market expectations, raising the likelihood of another interest rate increase in May. The year-on-year CPI increased by 7.1%, surpassing the previous month’s 7.0% print and the market’s anticipated 6.9%. This is the second consecutive increase following last month’s rise from 6.9% to 7.0%, bringing the year-to-date average to 7.0%.

To achieve the South Bank Reserve Bank’s 6.3% average projection, inflation needs to moderate for the rest of the year. However, there is a concern that water and electricity inflation may create upward pressure on administered prices in the coming months. Many South African municipalities have proposed municipal rate increases for 2023/24 in their draft budgets. These unweighted average increases include property rates (3.75%), water (10.11%), sewerage (7.78%), electricity (18.38%), and refuse removal (6.18%).

While sticky food inflation has surprised the South African Reserve Bank (SARB), Governor Lesetja Kganyago remains optimistic that inflation will return to the bank’s 3% to 6% target range in the fourth quarter, as projected.

Looking ahead to the SARB MPC meeting next month, Luigi Marinus, Portfolio Manager at PPS Investments, warns that the current hiking cycle may still need to have the desired weakening effect on inflation. Upside surprises in headline inflation suggest an increased risk of additional monetary policy action at the May interest rate-setting meeting, according to Momentum.

Despite the potential for further interest rate increases, PSG Wealth’s Adriaan Pask cautions that higher inflation expectations and depreciating currencies may lead to capital flow and market volatility, particularly for emerging market assets and currencies.

The SARB’s quarterly projection model also indicates a gradual normalization of policy rates through to 2024. PSG Wealth will continue to adjust its equity portfolios accordingly, taking into account the impact of fluctuations in inflation and interest rates on shares exposed to substantial discount-rate risk over this period.