The South African Reserve Bank (SARB) will keep the repo rate at 8.25% when its Monetary Policy Committee (MPC) meets on Wednesday (27 March), 23 economists unanimously forecast in a Reuters poll.
A slight majority predicted no change in the repo rate in May versus a 25-basis point cut, the poll also found.
Seven of 17 respondents expected a 50-bps reduction by the end of the MPC’s meetings in July and September, while five predicted a 75-bps cut. Four suggested a 25-bps trim, and one expected no change.
The average inflation expectation for this year among analysts, businesses, and trade unions is 5.4%, according to Momentum Investments.
Headline inflation ticked up from 5.3% year on year to 5.6% in February, moving closer to the upper limit of the SARB’s target range of 3% to 6%.
This was the second consecutive increase in the Consumer Price Index (CPI), which hits its highest level in four months.
The culprits were fuel and medical insurance costs.
Medical insurance, which accounts for 7.1% of headline inflation and 13.9% of the core basket, rose to 12.9% y/y in February from 6.9% y/y in January. The jump was on the back of high increases in membership contributions from medical schemes.
Premiums for all types of insurance have increased by 9.5% over the past year.
Core inflation excludes the more volatile price categories of food, fuel, and electricity.
Core inflation accelerated from 4.6% y/y in January to 5% y/y in February, the highest-level since June 2023. As with headline inflation, this was the second consecutive increase. On a month-on-month basis, core inflation rose by 1.2%, largely driven by higher medical insurance inflation.
Goods inflation decelerated to 6.2% y/y in February from 6.6% y/y in January.
Services inflation accelerated from 4% y/y in January to 4.9% in February, breaching the 4.5% mark after six consecutive months of tracking below the mid-point of the inflation target.
‘Delayed and shallower interest rate cutting cycle’
Momentum Investments’ macro-economic research team believe recent global and local developments point to a delayed and shallower interest rate cutting cycle.
One of the biggest risks to the inflation trajectory is the El Niño weather condition. The drier weather conditions are a potential risk for the food inflation outlook in particular.
Second, the volatility of inflation outcomes, coupled with the fact that headline inflation is hovering around the upper limit of the inflation target band, may be a concern for the SARB. The central bank has remarked that it needs to see a discernible trend that inflation is coming down towards the midpoint of the inflation target.
A third factor is elevated inflation expectations. Keeping interest rates higher for longer than expected may be a strategy that is implemented to communicate the SARB’s commitment to arrest inflation and guide it back towards the 4.5% mark.
Last, major global central banks are signalling a delayed and shallower interest rate cutting cycle. This is an important consideration from an interest rate differential perspective.
Momentum has revised its previous view that the SARB will begin the rate cutting cycle in the second quarter of 2024. It now forecasts that interest rate cuts are more likely to start in the third quarter of the year.
‘Risks to inflation are on the upside’
Casey Sprake, fixed-income investment analyst at Anchor Capital, also sees food prices as a key upside risk to inflation, given the ongoing supply shocks, particularly ahead of the El Niño weather pattern, and amid relatively large swings in commodity prices (including oil) and the rand exchange rate.
Inflation is likely to rise over the short term (off the back of increasing fuel costs, base effects, and the weak rand exchange rate), although Anchor believes the general trend for this year will be downward.
“We anticipate some moderation in consumer prices driven by a continued easing in food prices, which should help to counterbalance the projected uptick in fuel costs. Moreover, core inflation (particularly that of goods) will likely remain subdued as consumer demand continues to be constrained by the pressures of elevated interest rates,” Sprake said.
Food and non-alcoholic beverages (NAB) inflation eased from 7.2% y/y in January to 6.1% y/y in February. Consequently, the contribution of food and NAB to headline inflation decreased to 1.1 percentage points in February (previously 1.3 percentage points). Separately, food inflation was lower at 6% y/y (previously 7% y/y), and NAB inflation decelerated to 7.5% y/y (previously 8.1% y/y).
Food inflation accounts for 15.3% of the CPI basket.
Meat and egg prices are recovering from the impact of avian influenza, while the fruit and vegetable segment is rebounding from past challenges with harvests and quality, exacerbated by irrigation difficulties linked to power outages.
Nevertheless, she said, the overall risks to the inflation outlook have deteriorated – geopolitical tensions have worsened, and the deteriorating performance at key ports adds uncertainty to the future inflation path. Therefore, Anchor does not believe the SARB will rush to cut the repo rate.
“Any possible interest rate cuts will likely only materialise towards the end of 2024 and depend on the inflation outlook (locally and abroad) and global interest rate developments as we progress further into this year.”
Intensifying El Niño a threat to food inflation
The impact of the El Niño weather pattern on agricultural production has emerged as a significant threat to the inflation look.
South Africa has, for the most part, dodged the harshest impact of the ongoing El Niño season. Moreover, the country was largely cushioned by good soil conditions from the past three consecutive seasons of La Niña.
El Niño is associated with drier and hotter conditions in South Africa, whereas La Niña is associated with cooler temperatures and higher rainfall.
Agrikonsult previously flagged February 2024 as a risk, and this risk has materialised with parts of South Africa experiencing below-expected rainfall during February and extending into March. The UN’s Office for the Co-ordination of Humanitarian Affairs (OCHA) notes that South Africa may experience a decrease in crop production because of these drier conditions. According to Agbiz, February is particularly important for agriculture production because summer grains – including maize, soybeans, and sunflower seed – are in the pollination stage.
The Crop Estimates Committee’s first forecast for 2024 summer crops indicates a 13.5% drop in total crops compared to 2023, likely incorporating risks of the drier weather conditions. The largest decrease (22.8%) is recorded for soybeans, but more important to note is the expected decrease in total maize production (12.6% to 14.4 million tonnes).
Yellow maize accounts for 42% of total summer crops in 2024 and production is forecast to be 7.7% lower than the previous season. A bigger hit of 17.2% is expected for white maize, in particular, which accounts for 40% of total summer crops. This is also reflected in the increase in white maize prices.
According to the OCHA, the impact of El Niño has intensified in southern Africa, with the region reported to have experienced one of the driest Februarys in more than 40 years and consequently lost a lot of crops.
Agbiz says that South Africa still has a relatively stable grain supply compared to other parts of southern Africa. In terms of maize, Agbiz indicates that if the CEC’s harvest estimate of 14.4 million tonnes materialises, South Africa will be able to meet domestic demand of roughly 12 million tonnes and remain a net exporter, albeit at lower levels.
The SARB has previously stated that “the full impact of El Niño takes up to a year to crystalise and feed through to both domestic and global food prices”.
Higher fuel prices exert upward pressure on transport inflation
Transport inflation lifted to 5.4% y/y (contributing 0.8 percentage point) in February from 4.6% y/y in January. Higher transport inflation was largely driven by the fuel price increases in February.
The price of both grades of petrol increased by R0.75 per litre and diesel (0.05%) increased by R0.73/l. Consequently, fuel inflation was higher at 5.4% y/y in February from 3.3% y/y in January.
Private transport inflation went up to 5.5% y/y from 3.8% y/y in January. Public transport inflation also edged up to 2.2% y/y from 0.5% y/y over the same period after remaining largely flat for six consecutive months. Within public transport, passenger transport by air accelerated to 9.1% y/y in February (7.9% y/y in January).
The large fuel increases of R1.21/l for both grades of petrol and R1.06/l for diesel in March signal further upside pressure on transport inflation in March and an increased financial burden for households in the higher expenditure deciles.
Early data from the Central Energy Fund (published on 18 March) points to a slight increase of 14 cents a litre for petrol (95) and a decrease of 32 cents for diesel (0.05%) in April. The increase in the price of petrol is because of higher international oil prices on the back of geopolitical tension and the extension of voluntary OPEC+ production cuts until the second quarter of 2024.
The slightly stronger rand is helping to prevent a larger increase in petrol prices in April. The rand averaged R18.80/US$ in the first two weeks of March compared to R18.93/US$ over the same period in February.
Statistical information for this article was compiled using data from Anchor Capital, Momentum Investments, and Statistics SA.
