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South African inflation risks skewed to upside in coming months: Reuters poll By Reuters

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© Reuters. FILEPHOTO: Harare, Zimbabwe: May 5, 2016, South African Rands counted by a street money thief. REUTERS/Philimon Bulawayo

By Vuyani Ndaba

JOHANNESBURG – A rising risk of inflation will lead South Africa’s Reserve Bank, to raise interest rates by 75 basis point to 4.25% next fiscal year in order to control consumer prices over the longer term. This was according to a Reuters poll.

    The survey of economists, taken over the past week, showed the South African Reserve Bank would hike rates by 25 basis points in the first, second and fourth quarters.

    The bank kept its main repo rate stable at 3.50% last month, as an economic rebound following an easing of pandemic restrictions moderated. Although consumption spending is traditionally a major source of support for the economy, it shrank in years prior to COVID-19.

However, economists predict that inflation will rise as a result of a worldwide energy price crisis and supply chain bottlenecks. This is likely to lead to higher prices around the globe.

An additional question asked nine economists, who replied to a second question and said they believed that inflation risks were more likely to be on the positive side in the year ahead.

    On a longer term basis, the poll showed domestic consumer inflation was expected to slow to an average of 4.4% next year from an estimated 4.5% this year, before braking to 4.3% the following year. The bank was able to project all projections within its target range of 3% to 6%.

South Africa’s prices have been experiencing disinflationary pressures over the past five year. According to economists, price rises in South Africa have been resisted by the strong rand and lower import inflation pass-through. This has partly been absorbed by businesses.

    “Nonetheless, given the pro-inflationary global environment, we see risks to headline inflation squarely tilted to the upside,” wrote Andrew Matheny at Goldman Sachs (NYSE:).

    Soaring gas prices, staff shortages and a lack of ships have added to price pressures globally and may be picking up faster than anticipated, challenging a view that inflation will prove transitory.

    “Developments in services categories have been arguably more benign in South Africa than elsewhere, and we may see some catch-up in items such as hotels or domestic recreational activity as we get closer to the Northern hemisphere winter months, the peak tourism season in South Africa,” added Matheny.

Graphic: South Africa economic growth, inflation and monetary policy outlook – https://fingfx.thomsonreuters.com/gfx/polling/lgvdwlnaqpo/Pasted%20image%201634215477383.png

Following a strong first half in commodity prices, production and local growth economists expected that the median rate of local growth will slow down to 2.2%.

Annabel Bishop, Investec, stated that commodity prices will ease in 2022 but not collapse. Supply chain blockages may unwind eventually into 2023 but could worsen before then.”

    Goldman Sachs said signs of weak local demand should in turn hold back upside pressures from services. It said that while core inflation risks remain to be on the up side, they are more likely to occur in core services and goods than goods.

(For more stories on the Reuters global economy poll, click here

(Reporting and Polling by Vuyani NDaba; Editing By Bernadettebaum)

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