(Photo: selensergen/iStock)
Many South Africans may have been looking forward to an easier outlook at the start of the year: Inflation had receded, interest rates were expected to fall and the global economy seemed to be absorbing the tariff and trade drama. This meant that the local economy could slowly begin to recover.
“That encouraging story is now more complicated,” warns Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER).
While the question a few months ago was how quickly the interest rate will fall, now it is whether it will rise again.
The disruption to the global energy market drove up oil prices, increased fuel costs and created a renewed inflation barrier just when it looked like the road to 3% inflation was going to get easier. “For a small economy like South Africa, it spreads quickly through the economy – through the fuel pump, the exchange rate and ultimately to broader prices.”
However, policy makers have not done anything, says IJssel de Schepper. The temporary fuel levy relief helps to counter the shock, but even with a countermeasure, inflation is expected to rise. Headline inflation of around 4% is expected later this year, with some months even reaching 5% if the Iran conflict is not resolved soon. Higher outcomes are possible the longer the conflict continues.
IJssel de Schepper says the Reserve Bank is known for taking proactive measures to manage inflation, and with oil prices remaining high and disruption in the Strait of Hormoes continuing, the possibility of an interest rate increase seems greater.
“A small, early adjustment of 25 basis points, followed by more only if necessary, will be aimed less at the current fuel shock – which the interest rate cannot recover – and more at preventing secondary effects from taking hold.
“The distinction matters. This is not a demand-driven story that can be neatly resolved by stricter policy. This is a supply shock, imported and largely beyond our control. Rising rates are not going to lower oil prices or reopen shipping lanes, but they can help ensure that a temporary shock does not become a more persistent inflation problem.”
Higher interest rates, even small increases, will put pressure on already strained households and increase borrowing costs. “The trade-off is uncomfortable: short-term pain to avoid a more embedded inflation problem later.”
The Reserve Bank’s monetary policy committee meets again on 28 May.