SA’s Dance with Inflation and Rate Hikes

Last week saw an influx of economic data flood South African shores as local market participants came to grips with another 50 basis point rate hike, which sent the Rand plummeting to its weakest-ever level relative to the all-mighty greenback currency. Despite annual consumer price inflation (CPI) trickling down to an 11-month low, the South African Reserve Bank (SARB) voted unanimously to increase its benchmark interest rate by a further half-percentage point, bringing the repo rate to 8.25% and the prime rate to an eye-watering 11.75%.  

Annual consumer price inflation (CPI) trickled to 6.8% in April, down from 7.1% in March. However, SARB Governor Lesetja Kganyago emphasised that food, fuel, and electricity prices continue to keep inflation levels higher. Annual inflation for food and non-alcoholic beverages slowed to 13.9% in April, slightly down from 14% in March, as loadshedding places undue stress on local food retailers. Despite annual CPI slowing to its lowest reading since May 2022, when inflation was 6.5%, the SARB elected to raise borrowing costs by a further 50 basis points, bringing rates to their highest level since May 2009. With loadshedding increasing business and living costs, inflation risks have been revised to the upside, with headline inflation forecast to remain above the 6% upper target band until at least the third quarter of 2023.

The surprise 50-basis point rate hike saw the Rand deteriorate to its weakest-ever level on record against the US dollar, reaching a high of R19.81 to the dollar on Thursday, 25 May. Year-to-date, the Rand has deteriorated more than 15% to the dollar as local headwinds depress foreign investor sentiment. With no immediate resolution for the country’s ongoing energy crisis, sticky inflation, and high interest rates, South African consumers are forced to navigate a turbulent macroeconomic environment, at least for now.

Sources: Resbank, StatsSA, Trading View

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