Inflation expected to increase again while rand falls

The inflation rate is expected to rise again as the rand falls, which is unfavorable for expected high interest rates in a challenging financial environment for consumers.

This unfortunate news follows a significant fuel price hike and data from the National Credit Regulator indicating South Africans are increasingly struggling to repay their debts, while payday loans continue to surge.

Recent signs of rising price pressures, driven by volatile international oil prices, are once again raising concerns about increasing inflation in South Africa, according to Jee-A van der Linde, a senior economist at the economic research group Oxford Economics Africa.

“A strengthening US dollar has played a pivotal role in the rand’s weakness, compounded by concerns about the country’s deteriorating fiscal position. Reduced revenue performance due to power supply and logistical constraints, coupled with declining export prices, has reignited worries about South Africa’s fiscal stability.”

Van der Linde points out the strength of the US dollar has kept the rand under pressure, especially in anticipation of key US employment data.

“Significant concerns about South Africa’s fiscal situation are among the primary factors contributing to the rand’s current weakness. We can expect the rand to remain under pressure until the Medium-Term Budget Policy Statement (MTBPS) on 1 November, with exchange rate volatility likely to persist in the lead-up to next year’s general elections.”

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Weak rand affects everything

Oxford Economics Africa now predicts the rand will hover near the R19/$ level in the coming quarters. A weak rand poses a risk to domestic inflation.

“The South African Reserve Bank (Sarb) governor believes defending the exchange rate is futile. We concur, given South Africa’s weak macroeconomic fundamentals and the rand’s high daily trading volumes, which amplify its sensitivity to global factors.”

Despite the Sarb’s data-dependent stance, further interest rate hikes cannot be ruled out in the upcoming Monetary Policy Committee (MPC) meetings, says Van der Linde. The next MPC meeting is in November.

“While we don’t expect more rate hikes in our base case, we anticipate policy easing won’t happen soon, with the first repo rate cut likely in the fourth quarter of 2024.”

He cautions most supportive disinflation effects have already played out, and Oxford Economics Africa anticipates inflation to rise in the coming months. Producer inflation is already picking up speed.

“Significant domestic fuel price increases will drive fuel price inflation higher in the next few quarters. Our revised forecast predicts inflation to average 5.9% in 2023 and 5.5% in 2024.”

The “higher-for-longer” narrative has taken hold, affecting emerging market currencies like the rand, according to Van der Linde.

“Furthermore, concerns about South Africa’s fiscal position have recently intensified, as the country is no longer expected to achieve a primary budget surplus this year, a necessary step to stabilise government debt.”

The group forecasts a primary budget deficit of 0.3% of gross domestic product (GDP) for the 2023/2024 financial year, with government debt as a percentage of GDP expected to exceed 80% in the coming years.