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SA Reserve Bank remains restrictive and warns the government

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MARKETS ON MONDAY: The Monetary Policy Committee has once again pleaded for the government to help in the fight to curb inflation, writes economist Chris Harmse.

File picture: Bloomberg

THE MONETARY Policy Committee (MPC) of the SA Reserve Bank kept the repo rate at 8.5% as the inflation rate (CPI change) during October increased by 0.5% to 5.9%, just below the MPC’s upper target of 6.0%.

The CPI report from Statistics SA shows that especially food prices (8.8%), electricity (15.2%) water (7.9%) and petrol (11.9%) all increased much more that the CPI index of 5.9% in October a year ago. The worrying aspect of the increased food basket prices is that certain food product prices had increased with hyper inflation levels over the last year. These include rice (20.8%), bananas (38.0%), pumpkin (36.0%), potatoes (64.6%) and sweet potatoes (29.9%).

In reaction to the higher inflation risk and the hawkish stance of the US Federal Reserve on US interest rates, the MPC stays under pressure to continue with a restrictive monetary policy and also said that it could not give an indication when interest rates may start to come down, or if yet another hike could take place.

The MPC said: “With high interest rates and uncertainty, financial markets and asset prices are expected to remain volatile, dampening investor appetite and capital flows.”

The MPC also once again pleaded for the government to help in the fight to curb inflation. The MPC statement in this regard stresses: “Since early 2020, the Committee has recommended additional means of lowering inflation that are within the reach of the public sector, including achieving a prudent public debt level, increasing the supply of energy, keeping administered price inflation low and real wage growth in line with productivity gains. Such steps would strengthen monetary policy. During the Medium-Term Budget Policy Statement (MTBPS) delivered by the Minister of Finance three weeks ago the Minister of Finance ignored this call, once again.”

On the JSE, equity prices continue to recover. The all share index had increased by a sound 2.4% over the week and closed well above the 75,700 point level on Friday. In the US, the Dow Jones Industrial index gained 1.3% last week. The S&P500 traded 1.13% higher and the NASDAQ increased by 1.0%.

On the foreign exchange market, the rand exchange rate had a disappointing week. Against the US dollar the currency depreciated by 40 cents to R18.79 on Friday.

The price for Brent oil ended Friday at $80.58 (R1,484). Despite the much weaker rand by last Thursday, the petrol price, since the last fuel price adjustment at the beginning of this month, still over recovered by 103 cents a litre and that for diesel by 222 cents a litre. This implies that South Africans can expect a sharp decrease in fuel prices at the pump in December.

This week local markets will await the release of South Africa’s production price inflation (PPI) for October. It is expected that prices at the factory gate had increased by 5.9% from a year ago. This is a sharp increase from the 5.0% recorded in September.

On Friday, the new motor vehicle sales for November will be published.

On global markets, the main economic indicator that the market awaits is the US economic growth rate for quarter three. This number will be released on Wednesday. The market expects a sharp increase in the quarter on quarter seasonable adjusted and annualised figure to 5.0%, up from 2.1% during quarter two.

This strong increase may warn the market that the US Federal Reserve may not be so friendly on interest rates at their next meeting in two weeks’ time.

On Thursday, the US figures for personal income and spending during October will be published. The usual weekly jobless claims in the US and US gas and oil reserves data also will draw attention.

Fed chairperson Jerome Powell will deliver a monetary policy speech on Friday.

* Chris Harmse is the consulting economist of Sequoia Capital Management.

– BUSINESS REPORT

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