Inflation still high but could there be a repo rate cut up ahead?

Although South Africa’s inflation rate was unchanged at 5.2% in May, lower fuel prices and a firmer rand exchange rate point to stronger disinflation in the second half of 2024. This should see headline inflation reach the midpoint of the target range by the fourth quarter of the year, which could bring interest rate cuts forward.

Statistics SA announced the inflation rate for May on Tuesday and Jee-A van der Linde, senior economist at Oxford Economics Africa, says the outcome was on par with their expectations and in line with the consensus forecast of 5.2%.

The main contributors to the May annual rate were housing and utilities (+5.8% and contributing 1.4 percentage points), miscellaneous goods and services (+7.1% and contributing 1.1 percentage points), transport (+6.3% and contributing 0.9 percentage points) and food and non-alcoholic beverages (+4.7% and contributing 0.9 percentage points).

Core inflation, which excludes volatile items such as food, non-alcoholic beverages, fuel and energy, remained steady at 4.6%, while the latest data also shows that goods inflation was unchanged at 5.7%. Annual service inflation rose marginally to reach 4.7%.

Inflation held steady at 5.2% in May, but we expect it to cool over the coming months.

Source: Oxford Economics Africa

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Rate for May points to some stickiness

Van der Linde says the latest inflation print points to some stickiness, but stronger disinflation could see the headline rate at the 4.5% midpoint by the fourth quarter. “Sizeable fuel price cuts in June imply that overall inflation should ease further at the end of the second quarter, which was not our expectation initially.”

With markets cheering South Africa’s election outcome, the Rand exchange rate is likely to strengthen further in the immediate term before normalising towards the end of the year, he says. The Rand is currently oscillating around the psychological R18/$ level.

“This should provide further price reprieve in the form of lower fuel prices. However, there is still a risk that higher international oil prices might offset a firmer Rand. Headline inflation has proven sluggish to return to the coveted 4.5%, averaging 5.3% during the first five months of 2024.

“We expect the overall rate to trend lower in the second half of the year, which should see headline inflation average closer to 5% this year compared to our previous forecast of 5.2% for 2024. And although we believe that monetary authorities will be cautious and only start lowering the repo rate from the fourth quarter, the odds of a 25-basis point rate cut in September have increased.”

Interest rate cuts are heaving into sight.

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Food inflation will intensify in second half of the year

Koketso Mano, senior economist at FNB, also says the inflation rate was in line with their expectations.

“We should see headline inflation continue its plateau in June. Monthly pressure should remain subdued, as higher core inflation, supported by new data on housing price pressures, is mitigated by fuel deflation.

“Food pressures should intensify in the second half of the year as the impact of adverse weather conditions and higher soft commodity prices reaches retail shelves. In addition, utility price increases should also compound inflationary pressures.”

Nevertheless, he points out that slowing global inflation, softer oil prices, a less depreciated Rand, and subdued domestic demand should support slowing inflation going into 2025. “In line with this, headline inflation should average just above 5% this year, before slowing closer to the 4.5% midpoint over the remainder of the forecast period.”