Ominous signs as inflation expectations rise
Mbongeni Mguni | Monday August 8, 2022 06:00
The latest revelations are contained in the BoB’s Business Expectations Survey (BES) released this week which samples the opinions of a cross-section of firms about the business environment from the second quarter of the year and beyond.
In raising interest rates by 101 basis points in April and June, the BoB said the adjustments were needed to manage inflation expectations in the economy, noting the first quarter BES had shown worrying expectations among local firms.
The threat of Inflation expectations becoming entrenched in the economy is associated with firms pricing their views of future inflation into their products and services, landlords doing the same with their rental reviews, workers with their wage demands and so on, which self-actualises to higher real inflation.
The BoB uses the BES to track inflation expectations among local firms and the latest report indicates that these have worsened, despite the rate hikes, pointing to the possibility of further interest rate increases by the central bank.
Firms surveyed forecast inflation for 2022 of up to 20% and up to 15% for 2023, the BES indicates.
“Firms expected cost pressures to continue rising in the second quarter of 2022, mainly attributable to the increase in input costs, especially fuel price increases. “Firms’ expectations about domestic inflation were higher than the three to six percent objective range in 2022 and 2023,” the survey found.
Inflation expectations for 2022 average 8.5 percent in the latest BES, up from 8.3 percent in the last survey while for 2023, the firms expect average inflation of 7.9 percent, up from 7.5 percent in the previous survey.
The survey results come as the International Monetary Fund (IMF) said additional increases in interest rates were advisable to bring inflation back to the three to six percent objective range.
“In the absence of further tightening, the broad-based rise in inflation risks de-anchoring inflation expectations and requiring even sharper tightening later with negative effects on growth,” the IMF said in a report issued last week as part of annual assessments. On Wednesday, researchers at local economic consultancy, Econsult, also said the BoB would have to further hike interest rates, should inflation persist above the target range.
“Should inflation continue rising through the short-term and remain above the BoB’s three to six percent objective range for longer than the current medium-term expectations, or if global rates continue to rise, further increases in interest rates would be expected from the central bank,” the researchers said. “This, however, would not be ideal as it would further hinder the domestic economy’s post COVID-19 recovery efforts.”
The BoB has said its aggressive approach to tackling inflation as seen in the twin interest rate increases this year, is not yet harming the economy’s recovery from the pandemic.
“The sources of inflation are supply driven and monetary policy cannot deal with them directly, but we need to agree that inflation in general has to be dealt with decisively because it’s an enemy, it drives poverty and inequality,” deputy BoB governor, Kealeboga Masilila told BusinessWeek last Wednesday. “But even in saying we will deal with inflation, at the moment we don’t believe we are negative on growth by doing so because although rates have gone up, they are still modest and accommodative of productive borrowing and investments, while moderating demand that could be inflationary.”
He added: “Fiscal policy is also mostly expansionary and supportive of economic growth. Public service wages have gone up and there are structural processes and an agenda that are also positive for growth such as the COVID-19 response from government.”
Inflation averaged 10.9% in the first six months of the year and reached a 14-year peak in June of 12.7%. The BoB initially resisted hiking interest rates earlier this year saying the factors anchoring inflation were on the supply-side and driven by transitory external factors.
However, the upward swing in fuel and food prices and their respective uncertain forecasts due to Russia’s invasion of Ukraine in February, led the BoB to intervene in April and again in June.