THE South African Reserve Bank (SARB) has warned that consumer prices for food and transport could increase further if the hostilities in Ukraine continue to intensify.
SARB lead economist Dr Witness Simbanegavi said yesterday that the domestic headline inflation could rise if oil and gas supplies are additionally constrained due to the war.
The SARB forecasts headline inflation average 5.8 percent in 2022, well above the 4.9 percent forecast in January this year, and with risks tilted to the upside.
Simbanegavi said the upward drift in inflation expectations and sharply higher producer prices further tilt the inflation risk to the upside.
He said higher expected wage growth, a somewhat weaker rand and further advances in global goods prices could exert additional upward pressure on headline inflation.
“We want to point out that global inflation is sharply higher and it may stand out more persistently than previously thought,” he said.
“Administered price inflation (12.2 percent in 2022) will again exert upward pressure on headline inflation, having risen persistently above the upper limit of the inflation target range.
“And of course with higher inflation, we have seen that countries have moved to remove policy accommodation, both fiscal and monetary, and there is strong expectation that interest rates will start rising in advanced economies, especially in the US and the Eurozone.”
The annual inflation rate in the US accelerated to 8.5 percent in March, the highest since December of 1981 and slightly above market forecasts of 8.4 percent.
Simbanegavi was presenting the SARB’s monetary policy review for April in a webinar.
The monetary policy review showed that the Reserve Bank projected a higher near-term outlook for food and non-alcoholic beverages inflation of 6.1 percent in 2022, up from 4.2 percent projected in October.
It said this was due to the heightened global food inflation pressures, sharply higher energy prices, and a somewhat weaker rand.
The SARB also briefly noted that the recent heavy rains added to upside risks to domestic food inflation.
“Sharply higher petrol and food prices, and rising core inflation from a low base explain the elevated headline. Over the medium-term, pressures to headline inflation will emanate from core inflation.
South Africa’s economy is expected to grow at an annual average rate of 1.9 percent in the medium-term as the pandemic has scarred some sectors severely.
SARB governor Lesetja Kganyago said South Africa’s trajectory through the pandemic and into the recovery phase had demonstrated the overall macroeconomic resilience of the economy.
However, Kganyago said with the recovery being experienced due to reopening of economies, South Africa was moving rapidly from a severe depression to a great inflation.
“Keeping inflation low is important to support a recovery to better long term growth prospects,” he said.
“Unlike in the recovery phase, the growth outlook now is more subdued, as deep-seated structural constraints are expected to limit realised and potential growth.”
BUSINESS REPORT ONLINE