More pain ahead – Reserve Bank warns Ukraine war could mean higher inflation
[ad_1]
The Reserve Bank, in its latest Monetary Policy Review, has warned that higher domestic inflation could be on the horizon, if hostilities in the Ukraine war intensify or the supply of oil and gas become more constrained.
Add to that the upward inflation expectations and sharply higher producer prices, and the inflation risk leans to the upside.
Other factors that can place additional pressure on headline inflation are higher expected wage growth, a weaker Rand, and further increases in the price of global goods prices.
According to the South African Reserve Bank (Sarb), South Africa’s inflation rate shifted markedly higher, underpinned by record high fuel prices, and elevated food inflation, as well as rising core inflation, although from a low base.
ALSO READ: Homeowners must brace for interest rate hikes
Headline inflation
The average headline consumer price index (CPI) for 2021 was 4.5% compared to 3.3% in 2020 and is now expected to reach 5.8% in 2022, up from the previously predicted 4.2%. Administered price inflation of 12.2% in 2022 will again put upward pressure on CPI, rising persistently above the upper limit of the target range of the Sarb’s Monetary Policy Committee (MPC).
Core inflation, on the other hand, has remained subdued, kept down by unusually low insurance price inflation and despite a wide-ranging increase in service prices from low levels. In 2021 average core inflation was 3.1%, down from 3.3% in 2020, before it increased to a projected 3.7% in the first quarter of 2022.
The Sarb says sharply higher imported rates and the closing output gap are forecast to lift core inflation to 4.2% in 2022 and 5.0% in 2023, before receding to 4.7% in 2024.
ALSO READ: UK inflation strikes 30-year high
Global growth and inflation
The global environment had changed considerably by the time the March 2022 MPC meeting was held, with heightened downside risks to global growth, while new uncertainties surrounding the Russia–Ukraine war and its impact on oil and food prices and on supply chains emerged.
Concerns about the global economy have shifted in only 18 months from a ‘severe recession’ to a ‘great inflation’ as growth rebounded sharply, the Sarb says, which was led by the advanced economies, while emerging market economies recovered more slowly.
The sharp recovery generated severe price pressures, causing realised inflation to more than treble the inflation target in several advanced economies, driven by strong demand, sharply higher oil and food prices, and tighter labour markets.
After growing at 6.4% in 2021, the Sarb projects global growth to decelerate to 3.7% in 2022 and to moderate further over the medium term. In line with its global counterparts, the South African economy achieved substantial gains, growing at 4.9% in 2021 and recovering to within 2 percentage points of the 2019 output level.
ALSO READ: Higher chicken and red meat prices also on the menu for consumers
Local recovery for lower inflation
However, the pace of recovery was not uniform across sectors, with agriculture, finance and community, social and personal services surpassing their 2019 level of activity, while others, including transport, tourism, and construction remain severely depressed.
The Sarb explains that a slower recovery of the more labour-intensive sectors may explain the lacklustre recovery in employment, despite average earnings recovering to near pre-pandemic levels. Real GDP growth over the medium term is projected to average 1.9%, while potential is expected to average 0.9%.
However, the continued recovery of the domestic economy is threatened by inflation, which increased markedly after remaining subdued over the past three years. Sharply higher inflation risks are undermining economic growth further.
After keeping the repo rate unchanged at seven consecutive meetings since July 2020, the MPC began normalising the repo rate in November 2021 with a 25 basis point increase and two more since then.
ALSO READ: SA records price volatility in essential foods, hurting the poor
How to enhance domestic growth
Despite a less supportive global economic environment, the Sarb advises that domestic growth can be enhanced through creating a conducive investment climate, but structural reforms, such as embedded electricity generation, are needed to enhance efficiencies in key infrastructure sectors and unlock investment.
It is also important to stabilise public debt to lower long-term borrowing costs and further support investment, and simultaneously reduce the impact of administered prices on overall inflation and promote product market competition, allowing the economy to realise permanently lower inflation and lower borrowing costs.
The Sarb also noted that higher inflation is associated with lower growth and higher unemployment on the longer term, and worsens wage inequality in South Africa. Low and stable inflation, on the other hand, promotes economic growth and protects the real consumption of households, particularly those living on grants or pension income.
The attainment of low and stable inflation is necessary, but not sufficient, to achieve faster economic growth. A low rate should be complemented by structural reforms to provide sufficient energy for growth, reduce product and labour market regulation, lower the impact of administered prices on overall inflation, and further de-risk the economy by stabilising public debt.
These reforms are needed to bring about more dynamism in the economy, underpin low domestic inflation and permanently reduce borrowing costs.
[ad_2]
Source link
