Inflation dips as expected, while outlook for repo rate cut improves

South Africa’s inflation rate eased to 5.1% in June, as economists expected, while the outlook for inflation decreasing further also improved and economists expect it to trend lower to 4.9% this year.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the latest inflation print aligns with their projections and solidifies their view that the South African Reserve Bank (Sarb) will cut interest rates this year.

“The outcome was on par with our expectations and in line with the consensus forecast of 5.1%. The overall inflation rate continues to slowly revert to the midpoint of the inflation target band of 3%-6%.”

Van der Linde points out that South Africa’s inflation rate averaged 5.3% in the first half of 2024 and they forecast overall inflation to trend lower in the second half, averaging around 4.4%. “Overall, headline inflation should average lower at 4.9% this year compared to 5.9% in 2023.”

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He says domestic inflation expectations have improved recently, while core inflation should remain steady near the midpoint of the Sarb’s target band over the coming months. “After the Sarb’s split decision to keep rates unchanged at 8.25% during the July meeting, we believe interest rate cuts will happen in at least one of the final two meetings of 2024.

“Regardless, the September Monetary Policy Committee (MPC) meeting will make for a tight call on the repo rate, with US Federal Reserve actions also likely to be an important factor in this regard.”

Inflation expected to continue relative stability

Koketso Mano, senior economist at FNB, says inflation was slightly lower than their 5.2% prediction but aligned with the consensus expectation. “Headline inflation should continue its relative stability in July despite monthly pressures lifting strongly on utility cost increases and intensifying food price pressures.”

Nevertheless, he says, fuel deflation, after the R1 per litre reduction in petrol prices, should once again mitigate these pressures.

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In addition, he says headline inflation forecasts for 2024 and 2025 are being scaled down, as seen in the latest Sarb forecast as well, reflecting slowing global inflation, stable oil prices, a less depreciated rand and subdued domestic demand.

“However, upside risks are material as heightened geopolitical tensions affect logistics and the trade of goods. Furthermore, adverse weather conditions should support the premium on soft commodity prices. Therefore, while the IMF predicts that global inflation will slow to 4.4% in 2025, from 5.9% this year, the emphasis is that the road ahead should be bumpy.”

Some economists expect inflation to remain sticky around 5%

Johannes (Matimba) Khosa and Nicky Weimar, economists at the Nedbank Group Economic Unit, say they expect inflation to be sticky around 5% until the end of the third quarter before decelerating to the Sarb’s target during the fourth quarter, ending the year at 4.5% and stabilising around the midpoint throughout 2025.

“The downward pressure will come from muted global price pressures and subdued domestic demand, but base considerations, volatile international oil prices and high administrative price hikes will partly counter these. The outlook for food inflation also improved, with indications that the El Niño weather pattern has passed and the La Niña pattern is forming, which could bring above-average rain next summer, potentially boosting domestic and global food production. These will contain crop prices and ultimately filter through to other food prices.”

They assess the risks to their forecasts to be relatively balanced. “The rand remains a worry given its sensitivity to shifts in global risk appetites, which will likely remain volatile until US disinflation gathers compelling downward traction and the Fed starts its rate-cutting cycle.”

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Any relapse in global growth could be a problem

Khosa and Weimar warn that any relapse in global growth or signs of a hard landing in the US could also trigger another bout of risk-off sentiment. “In addition, the geopolitical landscape remains fraught with conflicts and tensions, which could again disrupt oil production and global supply chains.

“South Africa’s complex structural challenges against the backdrop of the changing political landscape also continue to pose upside risks to the inflation outlook.”

They point out that the Sarb’s July MPC statement showed improvement in the inflation outlook, with CPI forecast to fall within the Sarb’s target range in the fourth quarter compared to the second quarter of 2025 previously.

“At the same time, the economy continues to struggle and the US Fed is expected to start cutting interest rates in September. As a result, we believe that the Sarb will also begin its easing cycle in September, cutting by 25 basis points, followed by another reduction of the same magnitude in November, taking the repo rate to 7.75% and the prime lending rate at 11.25% by the end of 2024.”