Inflation outlook improved in recent months – good news for repo rate cut

South Africa’s inflation outlook has improved notably in recent months and the table is almost certainly set for a repo rate cut on Thursday.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the outcome was also in line with their expectations but slightly lower than the consensus forecast of 4.5%.

“August marks another benign inflation print with more disinflation anticipated over the coming months, thanks to favourable base effects, lower fuel prices and a firmer rand exchange rate.”

He says Oxford Economics Africa already noted last month that the headline rate would dip below the midpoint of the South African Reserve Bank’s (Sarb) inflation target band of 3% to 6%.

“Cooling inflation should give the Sarb greater confidence as it commences its policy loosening cycle. Our base case is for a 25 basis points repo rate cut this week and we think it unlikely that the Sarb will commence its easing cycle with a 50 basis points cut.

“An unchanged repo rate would be difficult for the Sarb to justify, especially if the Federal Reserve cuts US interest rates this week.”

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MPC meeting on Thursday after inflation news

He says Thursday’s Monetary Policy Committee (MPC) meeting may prove notable for several reasons:

• “Firstly, the Sarb has repeatedly stated its intention of lowering South Africa’s inflation target and maintaining a tight bias should help in this regard. Specifically, by pursuing a steady easing path the rand would likely strengthen further from current levels as South Africa’s real interest differential with the US widens while encouraging foreign capital inflows. Fitch Ratings expects a formal announcement and approval of a lower inflation target by early 2025.”
• Secondly, he says, lower fuel prices, retirement fund reforms and indeed interest rate cuts would boost the economy and add to stronger demand-side pressures. “Although real GDP (Gross domestic product) growth remains weak, household consumption (+1.4%) provided the biggest boost to real GDP growth in the second quarter. The forward-looking Sarb will be mindful of these undercurrents that could potentially stoke price pressures months from now. We believe there is scope for interest rate cuts even under a lower inflation target. In any event, when South Africa’s easing cycle kicks off, it will likely be short and shallow.”

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Inflation came in below FNB’s expectation

Koketso Mano, senior economist at FNB, says the inflation print was below FNB’s expectation of 4.6%. “Headline inflation could fall below 4.0% in September, as weak domestic demand keeps core inflation contained and falling fuel prices support lower transport costs.

“Weak global activity, alongside supply pressures, has supported softer oil prices and this has boded well for petroleum prices. Furthermore, the rand/dollar exchange rate has moved even closer to the estimated fair value of R17.50, supporting lower imported price pressures across the board.”

Mano says with just an update of the latest data, we could see inflation averaging 4.5% this year and falling closer to 4.0% next year.

“A potential interest rate cut by the US Fed this evening, weak domestic activity, less pessimism on the policy trajectory in South Africa and lower market-wide inflation expectations suggest that there is ample space for the Sarb to cut interest rates Thursday.

“However, the magnitude of the cutting cycle could be complicated by inflation dynamics in the second half of 2025, likely becoming less supportive, as base effects and global activity support the prices of commodities, while improving local activity supports services inflation.”

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Nedbank also expected inflation for August to be 4.6%

Johannes Khosa and Nicky Weimar, economists at the Nedbank Group Economic Unit, expect headline inflation to remain below the mid-point of the Sarb’s target range throughout the remainder of the year, ending 2024 at around 4%.

“Most of the downward pressure will still emanate from easing fuel prices. The price of Brent crude oil will be contained by subdued global demand and ample supply. Meanwhile, the rand has been resilient against a weaker US dollar bolstered by expectations for a US Fed rate cut and reduced political uncertainty following the formation of a Government of National Unity.

“These factors are expected to continue supporting the local unit in the coming months. The upside on inflation will mainly emanate from food, which is expected to begin edging higher as the base reverses”

However, they say, food inflation will be partly mitigated by global disinflation and favourable climate conditions. High wage settlements and the possibility of higher-than-expected electricity tariffs and other administered prices will also exert some upside pressure, they warn.

“Altogether, we forecast inflation to average 4.8% in 2024 and ease further to 4.3% in 2025 and 4.4% in 2026.”

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Sarb expected to begin repo rate-cutting cycle on Thursday

Khosa and Weimar say they believe that the lower inflation trajectory and the start of the cutting cycle in major economies, particularly the US, which is widely expected to start its cutting cycle later on Wednesday, will also prompt the Sarb to begin cutting interest rates on Thursday.

“We expect the Sarb to cut by 25 basis points, taking the repo rate to 8%, followed by another cut of the same margin in November. These policy decisions will see the repo rate at 7.75% and the prime rate at 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 the year.”