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ARTHUR KAMP: Repo rate set to keep grinding higher

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Bank’s quarterly projection model has been pointing to a prolonged, material interest rate hiking cycle for some time

Bank’s quarterly projection model has been pointing to a prolonged, material interest-rate hiking cycle for some timeIt would be no surprise if the Reserve Bank’s monetary policy committee increased its policy interest rate this week.

It may thus be tempting to dismiss the jump in energy and food prices as a “one-off” event that does not require a monetary policy response. However, history suggests we cannot be complacent. In the mid-2000s a sustained increase in energy and food prices relative to core consumer prices was followed by a sharp increase in core inflation as second-round inflation effects took hold in the period leading up to the global financial crisis.

Concomitantly, the nascent tightening of US monetary policy cannot be ignored. The US Federal Reserve has arguably been slow out of the blocks, but its recent communication has been decidedly hawkish, implying it is likely to become aggressive, if needed, to lower inflation. Indeed, in addition to a material US interest rate hiking cycle, which seems likely to continue into next year, the US Federal Reserve’s balance sheet is also expected to start shrinking by the middle of this year.

All else being equal, higher oil prices can be expected to constrain economic growth, not least because of the implied deterioration in SA’s terms of trade and the erosion of real personal disposable income. However, the accompanying bounce in commodity export prices is working in the opposite direction, improving trade terms and thus boosting domestic income and underpinning purchasing power.

 

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