Fourth consecutive drop in inflation should spur another repo rate cut

The fourth consecutive drop in inflation in September to 3.8% from 4.4% in August should give the Reserve Bank greater confidence to cut the repo rate by 25 basis points in November, economists say.

Statistics SA announced the inflation rate for September on Wednesday.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the outcome was slightly below our forecast of 3.9%. Inflation continues to surprise to the downside with the overall near-term outlook decidedly benign.

He points out that the latest inflation print of 3.8% shows that South Africa’s real repo rate is comparatively higher at 4.2%. “This should give the South African Reserve Bank (Sarb) even greater confidence to lower the repo rate by a further 25 basis points in November and continue its easing cycle well into 2025.

“In addition, the successive sub-4.5% inflation reading suggests that now might be an appropriate time to lower South Africa’s inflation target and we anticipate that Finance Minister Enoch Godongwana might shed further light on this topic when he delivers the Medium Term Budget Policy Statement next week.”

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Lower inflation good news for more repo rate cuts

Frank Blackmore, lead economist at KPMG, says the main reason for the inflation decline in September was the reduction in transport costs with both the strengthening rand and a drop in global fuel prices underpinning the result.

“This reduction would allow the Sarb to reduce rates further at the November meeting of the Monetary Policy Committee (MPC) meeting, potentially by 50 basis points although a 25 basis points decrease remains more likely, continuing their steady reduction cycle into 2025 to a level of around 7%, with prime at 10.5%.”

He says repo rate cuts will continue to put money in consumers’ pockets and give business an incentive to increase the rate of investment, resulting in higher economic growth and employment creation.

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Inflation expected to remain contained

Johannes Khosa and Nicky Weimar, economists at the Nedbank Group Economic Unit, expect headline inflation to remain contained in the coming months, with most of the downward pressure still from lower transport costs thanks to low fuel prices.

“The price of Brent crude jumped briefly in the first week of October, reaching $80 per barrel after Iran fired ballistic missiles at Israel. However, it has since retreated to around $75 per barrel as retaliation concerns subsided somewhat and also due to subdued global demand and ample supply.”

They point out that the rand has been resilient at the same time and will probably remain stable in the short term, supported by positive global risk sentiment as monetary policy eases.

“An increase in inflation will mainly emanate from food as the impact of drier weather conditions earlier in the year filters through certain food items and due to elevated domestic operating costs. However, food inflation will be partly mitigated by global disinflation and favourable climate conditions.”

They expect pressure on the inflation rate could come from high wage settlements and the possibility of higher-than-expected electricity tariffs and other administered prices.

“We forecast inflation to end the year at around 4% and average 4.6% in 2024. The risks to our forecast are tilted to the upside due to the price of Brent crude oil, which remains vulnerable to tensions in the Middle East.

“The biggest concern is that Israel could retaliate against Iran, which could potentially disrupt the oil supply channels around that area and result in another surge in the oil price.”

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Sarb making progress in battle against inflation

Ruan Yacumakis, quantitative analyst at Prescient Investment Management, says in the context of economic growth coming under pressure on the local and global front, it helps that the Sarb is making progress in its battle against inflation.

“With economic growth under pressure locally and globally, the Sarb’s efforts in the battle against inflation are crucial. However, we must remember that global inflation rates are still above target for many central banks and geopolitical uncertainties continue to pose risks.”

On a positive note, Yacumakis highlights the potential for long-term benefits. “This period could create an opportunity for the Sarb governor to pursue his long-held goal of lowering South Africa’s inflation target. Achieving this would benefit consumer affordability, boost business confidence and improve the country’s fiscal debt situation.”

While he cautions against expecting rapid rate cuts in the near term, he remains optimistic about the long-term outlook. “We could see meaningful progress towards a 3% inflation economy over the next two years, provided the right conditions are met.

“If stability in government and economic policy persists, this could position South Africa as a strong competitor on the global stage, opening up opportunities for future generations.”

He says South Africa’s inflation control, paired with stable governance, could indeed pave the way for sustainable economic growth and global competitiveness.