Inflation expected to rise further as rand falls

by MMC
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Consumer finances won’t improve anytime soon, with inflation and interest rates expected to remain high due to a weak currency and high fuel prices.

The inflation rate is expected to rise again as the rand weakens, which is unfavorable to the high interest rates expected in a difficult financial environment for consumers.

This unfortunate news follows a significant rise in fuel prices and data from the National Credit Regulator showing that South Africans are finding it increasingly difficult to repay their debts, while payday loans continue to rise.

According to Jee-A van der Linde, senior economist at economic research group Oxford Economics Africa, recent signs of growing price pressures, driven by volatility in international oil prices, are once again raising concerns about rising prices. inflation in South Africa.

“The strengthening of the US dollar has played a central role in the weakness of the rand, compounded by concerns over the country’s deteriorating fiscal situation. Falling revenues due to electricity supply and logistical constraints, coupled with falling export prices, have renewed concerns about South Africa’s fiscal stability.

Van der Linde points out that the strength of the US dollar has kept the rand under pressure, particularly ahead of key US jobs data.

“Significant concerns over South Africa’s fiscal situation are among the main factors contributing to the current weakness of the rand. We can expect the rand to remain under pressure until the Medium Term Fiscal Policy Statement (MTBPS) on November 1, with exchange rate volatility likely to persist in the run-up to the Rand’s general election. next year.

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Rand weakness affects everything

Oxford Economics Africa now forecasts the rand to hover near the R19/$ level over the coming quarters. A weak rand poses a risk to domestic inflation.

“The governor of the South African Reserve Bank (Sarb) believes that defending the exchange rate is futile. We agree, given South Africa’s weak macroeconomic fundamentals and the rand’s high daily trading volumes, which amplify its sensitivity to global factors.

Despite the Sarb’s data-dependent position, further interest rate hikes cannot be ruled out at upcoming meetings of the Monetary Policy Committee (MPC), Van der Linde said. The next MPC meeting will take place in November.

“While we do not expect further rate hikes in our base case scenario, we expect policy easing will not occur anytime soon, with the first repo rate cut likely in the fourth quarter of 2024.”

He warns that the most favorable disinflation effects have already occurred and that Oxford Economics Africa expects inflation to rise in the coming months. Producer inflation is already accelerating.

“Significant increases in domestic fuel prices will lead to higher fuel price inflation in the coming quarters. Our revised forecasts predict average inflation of 5.9% in 2023 and 5.5% in 2024.”

The “higher for longer” narrative has taken hold, affecting emerging market currencies like the rand, according to Van der Linde.

“Furthermore, concerns about South Africa’s fiscal situation have recently intensified, as the country is no longer expected to achieve a primary budget surplus this year, a necessary step to stabilize public debt. »

The group forecasts a primary budget deficit of 0.3% of gross domestic product (GDP) for the 2023/2024 financial year, with public debt as a percentage of GDP expected to exceed 80% in the coming years.

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