Inflation down but not expected to change repo rate

Headline inflation came in lower than expected at 5.1% in December, indicating that South Africa’s inflation rate averaged 6.0% in 2023, but economists do not expect it to convince the South African Reserve Bank’s Monetary Policy Committee to lower the repo rate tomorrow.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says South Africa’s overall inflation outlook improved somewhat following the latest CPI data release for December, but the organisation still does not expect an early rate cut by the South African Reserve Bank (Sarb).

Supply-side constraints will continue to undermine growth in the first half of the year, with the peak impact of tighter monetary policy also likely to weigh on household pockets during this time, he says.

“At the same time, we think that the bar for cutting rates remains high. The Sarb noted during its November policy meeting that it still sees serious upside risks to inflation. Consequently, the Sarb will want clear evidence that inflation is sustainably reverting to the midpoint of the target band before it considers lowering interest rates.”

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What inflation means for the repo rate

He says the Sarb’s Monetary Policy Committee (MPC) is also unlikely to cut rates ahead of the US Federal Reserve.

“The repo rate currently stands at 8.25% and we anticipate rate cuts from the second half of 2024 will result in the benchmark rate reaching 7.75% by the end of the year.”

In general, policy easing in South Africa for 2024 is set to be less pronounced than in other emerging markets and advanced economies.

“We forecast inflation to slow to an average of 5.2% in 2024 thanks in part to lower global food and fuel prices and due to soft domestic demand.”

Oxford Economics Africa expects that the benchmark Brent crude spot price will average $75.8pb in 2024, a decrease of 8.1% compared to 2023.

“However, the risks to the inflation outlook are skewed to the upside due to a weak rand, together with the possible escalation of the Israel-Hamas war and the Houthi attacks in the Red Sea.”

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Inflation higher for fourth quarter than Sarb expected

Independent economist Elize Kruger says the inflation rate was slightly lower than consensus, while the actual outcome for the fourth quarter of 5.5% is higher than the 5.3% the Sarb anticipated at the time of the previous MPC meeting in November.

“The Sarb will likely be disappointed at the stickiness of inflation and it will, in combination with a number of upside risks such as a weaker exchange rate and geopolitical uncertainties, justify the likely outcome of an unchanged monetary policy stance.

“I expect a fairly hawkish tone in the MPC statement tomorrow, signalling that it would be willing to sit on its hands for some more months and that they do not feel in a hurry to cut rates.”

ALSO READ: Concern that food inflation is still too high

Inflation only expected to fall in second half of 2024

Nedbank Group Economic Unit economists Johannes Khosa and Nicky Weimar expect inflation to be relatively subdued in 2024, hovering between 5% and 5.5% in the first half of the year before falling more convincingly towards the midpoint of Sarb’s target range during the third quarter.

“We expect inflation to average 5% for the year. The downward pressure will mainly emanate from Brent crude oil prices, which will likely be subdued by weak global demand and translate into lower fuel prices,” they said.

“However, the risks to our forecasts reside marginally on the upside due to the fragile rand, uncertainty in the global oil market, elevated food prices, high operating costs and added inflationary pressures due to exorbitant electricity hikes and high wage settlements.”

Due to all these risks to the inflation outlook, Khosa and Weimar believe that the MPC will present a hawkish statement tomorrow but keep interest rates steady due to the sluggish domestic demand.

“With inflation expected to remain within the Sarb’s target range this year and interest rates in most major economies, particularly in the US, having peaked, we expect the MPC to start a mild policy easing in May, followed by further cuts at each of the following meeting, leaving the repo and prime rates and 7.25% and 10.75% by the end of 2024.”

However, they warn, the first cut could be in July if election jitters hurt the rand and the US Federal Reserve starts cutting later than the currently expected May move.

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Inflation expected to approach mid-point of Sarb’s target range

Reza Hendrickse, portfolio manager at PPS Investments, says going forward, economists expect disinflation over the course of 2024, with CPI approaching the mid-point of the Sarb’s target range.

“This echoes the trend in the US, where inflation is also expected to continue falling in 2024. With inflation becoming less of a problem, it is likely we reached the peak in the interest rate cycle, which central banks also began alluding to.”

She says reduced price pressure and the lower debt funding cost would be well received by consumers who are starting to feel the pinch as is evident in recent results announcements from some domestic retailers.

“Although the current high interest rate environment is uncomfortable for borrowers, investors have been able to capitalise on the high yield available from low-risk asset classes such as cash. PPS Investments is currently overweight SA cash in multi-asset portfolios and are well-positioned to take advantage of the current interest rate climate.”

ALSO READ: Low-income consumers still paying more for food – household food basket

MPC expected to keep repo rate unchanged

The Don Consultancy Group’s chief economist, Chifi Mhango, says despite the inflation rate abating, the perfect stance for the MPC will be to keep the repo rate unchanged considering the underlying inflationary pressures and a weak economic environment domestically

“The latest annual headline inflation rate at 5.1% is 0.9% below the Sarb’s upper headline inflation target range of 3% to 6%. We expect that annual headline inflation will repress to a level of around 4.5% towards the second half of 2024, providing the MPC with a motivation to lower the repo rate.”

However, he pointed out that food inflation rate is currently at 8.5% and this will continue to pose a risk towards a projection of lower headline inflation.

“As we await the decision from the MPC, keeping the repo rate unchanged would be the best way to manage the current underlying inflationary pressures in the economy.”

Consumer spending in the South African economy is weak, with credit extension growth also slowing and this is mainly attributed to a restrictive monetary policy environment, he says. “Therefore, hiking the repo rate may also not be the right option in an already weak economy.”