Repo rate could rise to 6% over the next two years if Ukraine war drags on
As we write this, it has been about two months since Russia invaded Ukraine, and the war shows little sign of ending any time soon.
The Reserve Bank’s monetary policy committee meeting in March took place against a backdrop of heightened uncertainty about the direction of the oil price, inflation, global growth, and the US Federal Reserve’s more aggressive front-loaded rate-hiking trajectory. Based on the Bank’s revised forecast, its initial judgment is that a global stagflation shock, brought about by the war, will have a more pronounced impact on driving SA inflation vs curtailing real GDP growth. In the Q&A session, the Bank governor highlighted that, because of a “multiplicity” of external price shocks , the risk of broader price pressures has risen.
A sharp upward revision to the Bank’s 2022 nonoil commodity price forecast saw a major adjustment to the current account balance outlook. At a projected 3% of GDP, if it materialises, the sizeable surplus on the current account should continue to shield SA from volatile foreign capital flows amid accelerated global policy and long-term interest rate normalisation.
While in this volatile global environment uncertainty is indeed the only certainty, the unpredictability of the war, in our view, supports gradual rate hikes against the current economic backdrop and forecasts. We doubt that a 50-basis-point hike will curb inflation or inflation expectations more than two 25-basis-point hikes, while it may weigh on a still-fragile growth recovery that could be curbed further depending on how the war unfolds.
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