The variegated impact of inflation

What are the expectations for the future and how do we believe this will impact the local and international stock markets?

The World Bank has noted that: “Global inflation is expected to moderate next year, but it will likely remain above inflation targets in many economies”. The expectation, therefore, is that as global interest rates increase and as supply chains operate more optimally, we will see a more normalised inflation rate. Yet the Russian – Ukraine war may still continue for some time and therefore will likely cause a longer term elevated global inflation scenario.

What does higher inflation mean for our clients?

South Africa has not been able to avoid increased inflation. As the cost of imported goods and commodities rise, so has the South African inflation to 6.5%, notably being higher than the SARB’s target band of between 3% and 6%.

In order to curtail the effects of inflation, the South African Reserve Bank has increased the Repo rate to 4.75%, taking the prime rate to 8.25%. The average homeowner with a 20-year bond and a prime interest rate, will therefore be paying approximately R312 per month more for each R1m on their bond, further removing cash from potentially stimulating the economy.

Yet, as the Reserve Bank increases interest rates, many of our fixed income portfolios also have increased interest payable and therefore provided an increased investment return for our clients. Most of our clients’ investment portfolios in South Africa have a significant fixed income component which will benefit from increased interest rates.