Inflation expectations ease to 3,8% before Reserve Bank's 23 September rate call

Average inflation expectations two years ahead fell to 3,8% in the third quarter, from 3,9% in the previous survey, according to the Bureau for Economic Research at Stellenbosch University. The survey was released on Wednesday, eight days before the Reserve Bank’s Monetary Policy Committee meets on 23 September to decide the repurchase rate.

The benchmark rate has stood at 7% since the MPC’s July meeting, when it paused rather than cut. The committee has said it prefers expectations anchored near its 3% inflation goal, which is below the midpoint of its 3% to 6% target band. At 3,8%, the two-year-ahead figure is closer to that goal than it has been, but still above it.

What the survey measures

The BER survey asks economists, business people and unions what they expect prices to do over the next one, two and three years. The two-year figure matters most to the MPC because it strips out short-term noise from fuel and food, and because monetary policy works with a lag. If businesses and wage negotiators believe inflation will stay low, they set prices and pay demands accordingly, which helps the central bank keep it there. A reading that drifts up makes the MPC’s job harder.

Inflation itself peaked at 5% in June and moderated to 4,3% in July, still inside the target band but well above the 3% goal.

The economy the committee is looking at

Gross domestic product contracted 0,2% in the second quarter, ending six consecutive quarters of growth. That is the weakest backdrop the MPC has faced in more than a year. The contraction was driven partly by higher energy and fertiliser costs linked to tensions in the Middle East, which pushed up input prices for farmers and manufacturers.

Reserve Bank Governor Lesetja Kganyago said this month the committee would stay measured in its response to what he called polyshocks, including higher oil prices and an El Niño weather pattern that may reduce rainfall in the coming months and raise food costs. Forward rate agreements, which traders use to bet on borrowing costs, were pricing in a 52% chance of a 25 basis point hike at the September meeting on Tuesday, down from 56% the day before. A hike would take the repo rate to 7,25%.

What a hold would mean for households

If the MPC holds at 7%, the prime lending rate stays at 10,5%. A homeowner with a R1 million bond over 20 years pays roughly R9 990 a month at prime. A 25 basis point hike would add about R160 to that instalment. The same increase would raise repayments on a typical R350 000 vehicle finance agreement by around R50 a month over five years.

For savers, a hold keeps money market rates where they are. For small businesses with overdraft facilities priced off prime, the difference between a hold and a hike is felt in the monthly cash flow.

The credibility question

As Moneyweb reported on 16 September, Amundi SA’s Nicolas Dahan warned that another hold could dent the central bank’s credibility after its surprise pause in July. That is a fair point to put to the committee. The MPC has spent two years telling the market that it will act when the data warrants it. If expectations are falling and growth is contracting, a hold is defensible. If inflation is expected to rise again on oil and food, the committee may need to move.

Kganyago has said the Bank will not be swayed by a single data point. The BER survey is one input among many, alongside the monthly consumer price index, the producer price index and the Bank’s own quarterly projection model. The MPC’s statement on 23 September will set out which way it read them.

What happens next

The MPC announces its decision on 23 September. The next BER survey is due in December. Statistics South Africa publishes August inflation figures on 24 September, the day after the rate call.

Source: Moneyweb, South African inflation expectations dip before rate call