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After the good news that the inflation rate dropped from 5.1% in June to 4.6% in July, a bigger drop than economists expected, they now say all signs point to a repo rate cut in September, which will be good news for consumers battling to afford the payments on their debts.
Jee-A van der Linde, senior economist at Oxford Economics Africa, says the favourable inflation print should give the South African Reserve Bank greater confidence to start its easing cycle with a 25 basis points repo rate cut in September and back it up with another 25 basis points cut in November.
However, he notes that municipal tariff increases were tucked away in the inflation print and points out that although tariff hikes were generally lower in 2024, Statistics SA says that electricity tariffs increased by 10.5% on average per year between 2009 and 2024, outpacing the growth in water tariffs (10.2%) and property rates (6.8%).
“What’s more, electricity tariffs rose by an average of 11.2% per year over the 2019-2024 period. Eskom is purportedly proposing that electricity tariffs be increased by up to 40% in 2025. Fast-rising administered prices are hurting consumers and undermine monetary authorities’ efforts to achieve low and stable inflation,” he warns.
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Van der Linde says an annual increase of 6.0% in electricity and water tariffs could have resulted in inflation dipping below 4.5% in July, all else being equal.
“All the signs are pointing to a repo rate cut. Domestic inflation expectations have improved, while core inflation should remain steady below the midpoint of the South African Reserve Bank’s (Sarb) target band of 3%-6% over the coming months.”
He says optimism surrounding the government of national unity (GNU) bolstered the rand, which has also been spurred along by lofty gold prices on the back of US Fed rate cut optimism, with the domestic inflation outlook also more benign since the start of 2024.
“We anticipate that the Sarb will slash rates by 25 basis points in September, followed by another 25 basis points cut in November. Two out of six Monetary Policy Committee (MPC) members already voted to lower the repo rate by 25 basis points in July.
“While we are more certain about the likelihood of rate cuts over the coming months, it is unlikely that there will be a sense of increased urgency from the Sarb. We expect the MPC will opt for incremental 25 basis points moves rather than 50 basis points, although the bigger cuts now entered the discussion.”
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Johannes Khosa and Nicky Weimar, economists at the Nedbank Group Economic Unit, say the faster moderation in inflation is encouraging as it will ease the strain on household disposable income. “We now expect inflation to fall below the 4.5% Sarb target in September (from October previously) and average 4.8% for the year from 4.9%.
“The downward trend will primarily come from fuel and food prices. The subdued global economy will contain the price of Brent crude oil, which will translate into lower fuel prices. However, food prices will increase as the base for some food items has normalised.”
They also point out that the impact of the El Niño weather pattern experienced earlier in the year will also filter through to food prices in the coming months. Agribusiness Research has reported that the effects of the drought already started to bite consumers in Southern Africa, with some countries experiencing maize harvest drops of over 50%.
“But the impact on South Africa might be less pronounced due to improved farming practices, which rely less on rainfall for irrigation. Furthermore, weaker domestic demand will contain the rate at which firms can pass cost increases onto consumers without reducing sales significantly.”
They say the volatile international oil prices and the Rand, which are vulnerable to global shocks and risk appetites, remain significant concerns to the outlook.
“We believe the lower inflation trajectory and the start of the cutting cycle in the major economies will prompt the Sarb to start reducing interest rates by 25 basis points in September, followed by another cut of the same margin in November, taking the prime rate to 11.25 by the end of 2024. More cuts totalling 75 basis points will follow in 2025, taking the prime rate to 10.50 at the end of next year.”
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Prof Raymond Parsons, NWU Business School economist, says inflation in July showed a significant drop from the June level and confirms that inflation is steadily winding down and settling around the Sarb’s midpoint (4.5%) inflation target.
“These cost-moderating trends are now being further reinforced by factors such as the present strong performance of the Rand and the continued prospect of lower fuel prices. With core inflation now at 4.3%, it suggests South Africa is moving closer to low and stable inflation if current trends persist.”
Parsons says it will now be difficult for the MPC to justify keeping interest rates unchanged in the face of the much improved inflationary outlook. “The table is, therefore, being clearly set for an initial cut in interest rates when the MPC meets again next month. Although the rate reduction may only be 25 basis points at this stage – and no silver bullet for low growth – it would begin a welcome cycle of easing borrowing costs for business and consumers.”
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Koketso Mano, senior economist at FNB, says inflation could be broadly sideways in August, as any monthly pressure on food and utility costs is contained by the continued fall in fuel prices.
“Slowing global inflation, stable oil prices, a less depreciated rand and subdued domestic demand remain supportive to lower inflation this year. We anticipate that inflation will fall below the 4.5% target over the next few quarters but lift at the turn of next year as base effects become less favourable.”
Nevertheless, he says, this trend should support headline inflation averaging below 5.0% this year and potentially below 4.5% next year. He also warns there is still a risk of geopolitical tensions flaring up, lifting the risk premium on commodity prices and keeping logistical costs elevated.
Ruan Yacumakis, quantitative analyst at Prescient Investment Management says economists were surprised by lower contributions from core goods/services, alcohol/tobacco and water and electricity. They forecast a headline inflation number of 4.8% in recent surveys.
“With global inflation pressures also letting up and US growth coming under pressure, the door is wide open for seeing our first interest-rate cuts in September for both the US and South Africa. Looking ahead, tailwinds like the prospect of expedited political reforms in South Africa (which will support the Rand), along with lower interest rates and inflation globally, support the view that local inflation is well under control, especially since demand-side pressures on prices are minimal.”
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