The South African Reserve Bank will have no choice but increase the repo rate tomorrow, after a GDP contraction in the second quarter, persistent high inflation and continuing high frequency of load shedding. Members of the Monetary Policy Committee of the South African Reserve Bank will be keenly aware of the negative impact of supply shocks on the economy when they meet tomorrow, says Arthur Kamp, chief economist at Sanlam Investments. “After all, real GDP contracted - 0.
Kamp says it is reasonable to argue economic activity should lift once one-off supply shocks fade, but the tailwind provided by buoyant commodity prices is waning as South Africa’s terms of trade, although still elevated, decreases in response to weakening global production and recession fears in some countries.The spike in headline consumer price inflation to an annual increase of 7.
“Although headline consumer price inflation is expected to slow to around 5% a year from now, it is forecast to average around 6.5% over the next twelve months, given current information. Hence, at 5.5%, the Bank’s repo rate is not overly restrictive.” Kamp says this implies the FOMC has more work to do and accordingly US interest rate hike expectations have continued to drift higher with another material increase in the Federal Funds Target Rate, in the region of 75 basis points, expected at the conclusion of the US FOMC meeting on Wednesday.
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