Global interest rates are rising on the back of spiralling inflation and supply chain disruptions that could intensify if further lockdowns are implemented in China, economists have warned.
Bureau for Economic Research (BER) economists noted in their Weekly Review on Monday that inflation had hit a fresh 40-year high in the United States, while the European Central Bank (ECB) and SA Reserve Bank (SARB) were both expected to respond to economic pressures with further interest rate hikes this week. The market has already priced in a Federal Reserve Bank interest rate hike of 75 basis points ahead of its committee meeting next week.
“Global financial markets were unsettled last week by developed country inflation numbers that exceeded expectations. In the US, headline CPI reached a fresh 40-year high of 9.1% y-o-y in June,” the economists said.
Several central banks hiked interest rates last week, including a shock 100bps hike by the Bank of Canada and an unscheduled 75bps increase by the Philippine central bank.
“One of the reasons behind the higher inflation internationally over the past few years has been supply chain disruptions,” the BER economists said.
Rising Covid-19 cases in China, mainly due to new variants, have now heightened concerns about further disruptions.
“Although the number of new infections is comparatively low, with China’s zero-Covid policy, swift and aggressive action is likely in order to contain any possible outbreak. A number of smaller cities across the country have already been placed under stricter lockdowns. The fear is that bigger cities such as Shanghai and Beijing may also be subjected to harsh lockdowns as testing ramps up. This could severely affect growth, just as the economy recovers from severe lockdowns in April and May. Renewed lockdowns will also place renewed strain on global supply chains,” the economists said.
The oil price, one of the other main sources of global inflation pressure, declined significantly last week. The positive impact of the lower oil price in recent weeks can already be seen in SA petrol price dynamics.
“Despite the sharply weaker rand of late, the over-recovery - this is the average petrol price in July at market prices compared to the current retail price - on the petrol price so far in July is sitting at an average of well above R1 for all grades of petrol,” the economists said.
Along with food, the transport component of the SA CPI (Consumer Price Index) basket has been the biggest contributor to high headline inflation in recent months.
“If the notable over-recovery is sustained through the rest of the month, it would more than nullify the 75c rise in the petrol price due to the end of the temporary fuel levy relief at the start of August. This will provide consumers with some reprieve at the petrol pumps,” economists said.
However, consumers can expect another interest rate hike when the SARB monetary pricing committee meets on Thursday.
