Slight dip in inflation no immediate benefit for interest rates

The slight dip in inflation for September will have no immediate benefit for interest rates, with the SA Reserve Bank still expected to increase the repo rate by 75 basis points in November, while price inflation is expected to remain high in the coming months.

South Africa’s annual inflation rate eased to 7.50% in September compared to September 2021 from 7.60% in August but remained above the upper limit of the South African Reserve Bank’s (Sarb) target range of 3% to 6%.

According to the latest data from Statistics South Africa, prices eased for transportation (17.90% vs 21.20% in August), driven by falling fuel costs (34.10% vs 43.20%). However, price pressures increased for other CPI items, including food and non-alcoholic beverages (11.90% vs 11.30%), housing and utilities (4.20% vs 4%) and restaurants and hotels (7.90% vs 5.80%), as well as miscellaneous goods and services (4% vs 3.70%).

Annualised core inflation, which excludes food, non-alcoholic beverages, fuel and energy prices, rose to a five-year high of 4.70% compared to September 2021, from 4.40% recorded in August. On a monthly basis, consumer prices rose by 0.10%, from a 0.20% increase in August.

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Inflation outlook remains the same

Economic research group, Oxford Economics Africa, says the latest moderation in headline inflation does not change its overall inflation outlook for South Africa.

“We forecast inflation to average 6.8% in 2022, as elevated costs across the board mean that price inflation will remain high over the coming months.”

The group says the Sarb will want to see further evidence of slowing inflation that would help to keep inflation expectations in check. In addition, hawkish pressure from the US Fed, together with ongoing rand weakness, implies that the Sarb is more likely to hike rates by 75 bps in November.

“Headline inflation eased for the second consecutive month in September, driven mainly by a moderation in transport inflation, thanks to fuel price decreases in that month. We expect to see further disinflation over the coming months, but price inflation will remain sticky at elevated levels, with the headline rate expected to dip below the upper-end of the Sarb’s target range of 3%-6% in the second quarter of 2023 only.”

Oxford Economics Africa says inflation is projected to average 6.8% this year compared to 4.5% in 2021. “The Sarb has made it clear that interest rates will only be lowered on a sustained drop in price inflation. Consequently, we forecast that the apex bank will raise the repo rate by another 75 bps (to 7.0%) during its final meeting of the year in November.”

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Central banks will still raise interest rates

Adriaan Pask, CIO at PSG Wealth, says while it is encouraging to see a second consecutive decline in CPI, higher inflation expectations and depreciating currencies continue to reinforce the pressing need for central banks to accelerate the normalisation of their policy rates, tightening global financial conditions.

“On balance, capital flow and market volatility are expected to remain elevated for emerging market assets and currencies. The implied policy rate path of the Sarb’s quarterly projection model indicates gradual normalisation through to 2024.”

Pask says they will keep an eye on the impact of fluctuations in inflation and interest rates on shares exposed to substantial discount-rate risk over this period and we will continue to adjust their equity portfolios accordingly.

He pointed out that the FTSE/JSE All Share Index (ALSI) fell by 1.19% to 65 560.40 points on Wednesday morning. Resources and industrial counters were down, while financials advanced.

“However, losses were trimmed by expectations that the Sarb will continue to hike borrowing costs to curb price pressures. Governor Lesetja Kganyago said in a press release that “local borrowing costs will only be lowered when inflation retreat toward the midpoint of the central bank’s target range is sustained.”