What are the chances of the Sarb now joining the 75-bp interest rate club?

SA’s highest inflation rate in five years was a wake-up call to how much more food prices are rising. It also highlighted that second-round inflationary pressures are materialising. Are these inflation trends sufficiently worrying to justify the SA Reserve Bank following in the US Fed’s footsteps with a hefty 75bp rate hike in July?
The big question following this week’s shock inflation number is whether the SA Reserve Bank will decide to become part of the 75 basis point interest rate club in the wake of the US’s June decision or remain in the 50-bp club, alongside a host of other countries.
What isn’t in doubt is that economists agree that the South African central bank will need to increase interest rates by at least 50bp at the meeting if it wants to make headway into containing the highest consumer inflation rate in five years and what are becoming significantly more broad-based inflationary pressures.
The two inflation dynamics that central banks most want to avoid are rising inflation expectations and second-round inflationary effects — and it is the latter that became clearly evident in the latest South African inflation statistics.
BNP Paribas South Africa senior economist Jeff Schultz calculates that some 30% of the consumer inflation basket is now experiencing one percentage point plus month-on-month increases, versus 6.5% of the basket four months ago. This is a strong indication that second-round inflation effects are taking hold in the economy and a cause for concern for Schultz.
Says Schultz: “GDP levels back at pre-Covid levels coupled with evidence of building second-round price pressures means that the Sarb will likely favour a more frontloaded hiking cycle.”
But is this frontloading likely to include a hefty 75bp increase in the wake of the Fed’s outsized 75bp June hike — or will we see another 50bp hike? Schultz thinks the hurdle for a more aggressive 75bp hike next month (versus his current expectation for 50bp) is now substantially lower following the CPI data.
Old Mutual Multi Managers investment strategist Izak Odendaal still thinks a 50bp hike is more likely, “rather than tipping the Sarb over into 75bp territory”. His rationale: South Africa doesn’t have the same degree of inflation worries as the US.
Consumer inflation in the US is currently more than two percentage points higher than in South Africa, namely 8.6% versus 6.5% in May. That compares with a year ago when US inflation was 4.7% — 50 bp lower than ...