Adriaan Pask, CIO at PSG Wealth

Soaring energy prices were already dominating news headlines before Russia – a key exporter of commodities - initiated a military attack on Ukraine. Energy inflation already rose prior to this conflict due to global supply chain bottlenecks caused by the pandemic. Now, as the conflict intensifies, inflation risk has become undeniable, adding more pressure on central banks to regulate monetary policy and fend off the global stagflation. Over the past few weeks, oil, fuel, and gas prices have skyrocketed, while grain and many other commodities worldwide have swelled to record highs. 

If the war drags on for longer, economists expect global inflation to rise, placing further upward pressure on interest rates. So far, the Bank of England (BoE) has been marginally ahead of the curve on monetary policy normalisation, after ending its quantitative easing (QE) programme and hiking the benchmark interest rate to 0.75%, hoping to reach 2% in the next 12 months. This is in response to a 5.50% inflation rate that is expected to peak at above 7% in the next month if energy prices continue on an upward trend. 

Meanwhile, the US Federal Reserve (Fed) has raised interest rates Weekly Insights The risk of rising energy prices, broader inflation, and rising interest rates to 0.50% and warned of six more rate hikes in 2022 to offset an inflation rate that’s already near 8%.

In South Africa, the central bank’s (SARB) quarterly projection model is pricing in a quarter-point increase in the benchmark repo rate to 4.25% when policymakers announce their next decision this Thursday. At its previous meeting in January, the SARB upwardly revised its inflation projection to 4.90% for 2022 and 4.50% for 2023. These revisions came as Eskom announced plans to increase electricity prices by 20.50% in April 2022, following a 15% increase in 2021. Considering recent oil price increases on the back of the Eastern European conflict, a consensus amongst economists is that the SARB might again revise its inflation projection to above 5% for 2022. However, if the rand remains resilient and sheltered by higher commodity prices, the SARB is expected to keep its gradual hiking pace. 

Over and above, the severity of the situation depends on how long the war in Europe lasts, whether energy and other commodity prices remain elevated, and how aggressively central banks act.

Bottom line

Although our base case is that inflation will remain elevated, even if it does abate, we believe interest rates will rise materially. Interest rates are very low currently, meaning that policymakers find themselves without the ability to decrease rates should the economy face a challenge

SA inflation rate

The Event

• South Africa’s Consumer Price Index (CPI) remained unchanged at an annualised 5.70% in February2022, the same level recorded in January 2022, but below market expectations of 5.80%.
• This was largely driven by food and non-alcoholic beverages which recorded a 6.40% increase, housing and utilities which rose by 4.40%. Transport that spiked by 14.30% also contributed 1.90% to the overall inflation rate; and miscellaneous goods and services spiked by 3.20%.
• On a monthly basis, inflation rose by 0.60%, following a 0.20% increase in the previous month and below market expectations of 0.75%.
• Annualised core inflation, which excludes food, non-alcoholic beverages, fuel, and energy prices, remained unchanged at 3.50% in February 2022, slightly below market predictions of 3.70%.

The Impact 

• The JSE cheered news of softer consumer prices, rising to 0.05% at 10h16. The biggest winners of the morning session were PSG Konsult (up 6.03%), Harmony Gold Mining (4.77%) and Impala Platinum Holdings (4.69%).
• The rand extended its upper hand against the dollar trading at R14.82 at 10h30, and the euro trading at R16.33/€ but lagged the pound trading at R19.20/£.
• South Africa’s 2-year government bond yield fell to 5.48%, while the 5-year and 10-year yields came in at 8.44% and 9.80%, respectively.
• Stats SA has updated its CPI basket of goods and services to thoroughly reflect patterns in household spending, technology, and consumer preferences. Following the most recent update, the CPI basket now comprises of 415 entries, up from 404 recorded in the last update five years ago. New additions include consumer technologies, personal care products, alcohol beverages and household items.

The Assessment 

• The implied policy rate path of the South African Reserve Bank’s quarterly projection model is still pricing in a quarter-point increase in the benchmark repo rate when the central bank announces its next decision this week on 24 March 2022, as well as more than a 70% chance of a 50 basis-point increase.
• We remain watchful of the impact of fluctuations in inflation and interest rates on shares exposed to substantial discount-rate risk over this period and we will continue to adjust our equity portfolios accordingly.
• The next release date for inflation levels recorded in March 2022 CPI data is scheduled for Wednesday, 20 April 2022