The South African Reserve Bank (SARB) is expected to keep the repo rate at 8.25% when its Monetary Policy Committee (MPC) meets on Thursday amid lingering risks to inflation and a cautious approach by major central banks to easing.
Headline inflation, as measured by the Consumer Price Index (CPI), softened in April, declining to 5.2% year-on-year from 5.3% in March. The headline inflation rate has held its ground between 5% and 6% since September 2023 after dipping to the upper 4% range in July and August 2023.
Core inflation (which excludes the more volatile price categories of food, fuel, and electricity) dropped to 4.6% y/y from 4.9% in March. This softening of core inflation was unsurprising, given the subdued demand in the economy, the low exchange rate pass-through, and the relatively minor spillovers from elevated fuel and electricity prices, said Casey Sprake, Anchor Capital’s fixed income analyst.
The SARB aims for inflation to be closer to the midpoint of its target range (4.5%), and current levels are still higher than this preferred rate. The SARB considers not only a single month’s inflation data but the broader trend. Despite the recent fall in inflation, it has been high for a prolonged period, and the SARB will need more consistent evidence of a downward trend before adjusting the repo rate.
“The central bank has remained steadfast in communicating that it will not move the policy rate lower – and thus essentially usher in a rate-cutting cycle – until inflation is under control and sustainably hitting that target,” Sprake said.
The consensus among economists is that the SARB will consider a rate cut towards the end of 2024 – but this will depend on the inflation outlook domestically and globally.
The new core inflation measures developed by the SARB – “supercore” and “persistent and common component of inflation” – indicate elevated inflationary pressures.
“The SARB expects inflation to moderate in the second quarter of 2024 compared to the first quarter, with headline inflation easing faster than core inflation. Headline inflation is expected to ease by three percentage points to 5.1% in the second quarter and core inflation is expected to ease by one percentage point to 4.7%,” said Sanisha Packirisamy, an economist at Momentum Investments.
“Headline and core inflation are expected to tick up in the third quarter, likely driven by higher municipal charges. Upward inflationary pressure in the third quarter may also stem from rental inflation and the expected impact of the drier and hotter weather conditions in February and March 2024. Thereafter, headline inflation is expected to ease as the quarters progress but at a slower pace given the stickiness in core inflation. The SARB expects headline inflation to settle at 4.5% from the fourth quarter of 2025 onwards,” she said.
Packirisamy said the SARB is also keeping an eye on the rate decisions by major central banks, particularly the United States Federal Reserve. Interest rate differentials impact capital flows, and this could result in a weaker rand and consequently lead to higher imported inflation.
Annabel Bishop, Investec’s chief economist, said this forecast scuppers any chance of an interest rate cut this year, and makes one likely only towards the end of 2025, if at all.
Investec believes a better-than-expected CPI inflation outcome is possible this year. The bank expects CPI to reach 4.5% in the fourth quarter of this year, which will result in a faster rate cut. But risks remain to this view.
South Africa’s Forward Rate Agreement curve has factored out the possibility of interest rate cuts this year, and the markets do not see cuts in the repo rate next year either, Bishop said.
Investec believes the repo rate will remain unchanged until September. A single 25 basis point cut is on the cards when the MPC holds its final meeting of this year in November.
The group forecasts the cutting cycle will see the repo cut by a cumulative 150 bps and will end around the middle of 2025, when the repo rate will be 6.75%.
Nedbank’s economists expect inflation to decline gradually this year. Inflation is likely to be sticky at around 5.2% over the next two months before slowly drifting lower, dipping below 5% in September and ending the year at 4.8%.
“The stickiness will stem from the lower statistical base, elevated global oil prices, and some moderation in food disinflation later this year. The downward pressure will come from continued global disinflation and weak domestic demand. Altogether, we forecast inflation to average around 5% in 2024, easing to 4.6% in 2025 and 4.5% in 2026.”
Nedbank believes the SARB is likely to wait for the elections to pass and for more evidence to emerge that inflation is trending towards 4.5% before easing monetary policy.
“We believe that the data will support modest easing later this year. We expect the first 25 bps cut in September, followed by another in November, taking the repo rate to 7.75% and the prime lending rate at 11.25% by the end of this year.”
Mixed bag on food inflation
Lower food and non-alcoholic beverages (NAB) inflation, as well as lower miscellaneous goods and services inflation in April, offset higher transport inflation and restaurant and hotels inflation.
Food and NAB inflation dropped to 4.7% y/y in April from 5.1% y/y in March. This represents the fifth consecutive decrease in food and NAB inflation and is the first time the category has dipped below 5% since September 2020.
More encouragingly, food inflation decreased to 4.4% y/y in April from 4.9% y/y in March, with prices easing in seven out of nine food categories.
Meat decreased to 0.5% y/y in April from 0.8% in March. Bread and cereals dropped to 4.3% y/y from 5%. Milk, eggs, and cheese moderated to 8.7% y/y from 10.1%.
Packirisamy said although meat prices increased by 0.5% – the smallest rise since July 2019 – meat inflation at a producer level jumped to 12.1% y/y in March, signalling higher meat prices ahead. Furthermore, a 6% surge in agricultural crop prices at the producer level flags concerns over bread and cereal inflation for consumers in the coming months.
The inflation rate of several food items increased in April, contributing to the mixed picture of food inflation for the month:
- Vegetables increased by 7.4%, up from 6% in March.
- Fruit rose to 4.5% in April, compared to 3.3% in March. Higher prices for bananas and apples were significant contributors to this increase.
- Rice accelerated to 26.4%, the highest since May 2009 when it was 41.9%.
- Pizzas and pies, instant noodles, and sweet biscuits experienced notable hikes.
Sprake said although food inflation has declined significantly over the past two months, the rising costs of maize and wheat – coupled with the effects of a drier season in certain key production regions – could potentially stall this momentum. “As a result, we continue to view food prices as a key upside risk given the various ongoing supply shocks, particularly amid the current El Niño weather pattern.”
Fuel inflation is trending lower
Following the unexpected drop to 5.3% y/y in March, transport inflation edged back up to 5.7% y/y in April. The main culprit for this rise was private transport operation inflation (fuel) surging from 6.2% y/y in March to 9% y/y in April.
The Central Energy Fund (CEF) announced a slight increase of R0.37/l in the price of petrol (both grades) in April, while diesel decreased by R0.30/l.
Data from the CEF published on 20 May suggests fuel price cuts in June of about R0.84/l for petrol (95 ULP) and R0.90/l for diesel (0.05%)
The SARB’s outlook to the fourth quarter of 2026 projects that fuel inflation will remain low, with some months of disinflation. Fuel inflation is expected to average close to the lower end of the inflation target in the second and third quarters of 2024 at 3.7% and 3.2%, respectively, and drop to negative 5.5% in the fourth quarter of 2024. This means fuel inflation is not expected to place upward inflationary pressure during this year, but oil price and exchange rate movements are key risk factors to fuel prices, Packirisamy said.
“While the escalating conflict in the Middle East poses a risk of higher international oil prices, financial markets have remained relatively calm, not yet pricing in the potential for a full-scale war,” she said.
