Will inflation dip below 5% to lead to a cut in repo rate?

All eyes will be on Statistics SA on Wednesday when it unveils the inflation rate for July.

If it dips below 5% it will likely signal the South African Reserve Bank to cut the repo rate in September.

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), says they expect headline inflation to dip below 5% for the first time since August 2023.

“We see inflation slowing to 4.9% from 5.1% in June, with core inflation steady at 4.5%.

“Headline inflation should moderate through the remainder of the year and reach the 4.5% midpoint target in September. The lower inflation profile will give the South African Reserve Bank (Sarb) scope to cut the repo rate next month.”

For now, the BER forecasts a cut of 25 basis points, De Schepper says.

“We see a possibility of the Sarb frontloading by 50 basis points in September. For this to materialise, the Rand exchange rate would need to ‘behave’ (with higher probabilities of faster Fed easing possibly helping in this regard) and the oil price should not spike up on a sustained basis.”

She points out that market developments and global monetary policy dynamics, particularly decisions by the Fed which meets the day before the Sarb and the actual inflation rate for July and August (the day before the September Sarb meeting) will help shape this view.

“Services inflation trends will be particularly important. The BER’s inflation expectations survey out on 12 September is also key.

If expectations are sticky, a bigger cut is unlikely, but we do know the Sarb targets 4.5% and inflation is heading there and for now, likely to stay there. Therefore, some easing from the current restrictive stance is warranted.”

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Nedbank economists predict 4.9%

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say they forecast headline inflation to ease further to 4.9% from 5.1%. “The downward pressure will come primarily from transport costs, forecast to decline by 0.7%, reflecting lower petrol prices, which dropped by 4.1% on falling global oil prices and a steady Rand.

“The price of Brent Crude oil declined by 2.9%, while the Rand held steady against the US dollar. Food and beverages inflation will start to edge up off a lower base, rising to around 4.9% from 4.6%. However, services inflation will partly offset subdued food prices and lower fuel prices.”

They point out that many services are surveyed in July, including housing and utilities, building and household content insurance and bus fares. In the ‘housing and utilities’ category, pressure will mainly come from electricity tariffs as the National Energy Regulator of South Africa approved Eskom’s request for a 12.7% tariff increase.

“As a result, municipalities raised their electricity tariffs from July. On a monthly basis, consumer prices probably increased by about 0.7% in July, up from 0.1% in June, pushed up by seasonal price adjustments in some of the major categories.”

ALSO READ: Repo rate remains unchanged at 8.25%

FNB economists predict 4.8%

FNB economists, Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, say despite higher monthly inflation, they predict that headline inflation will ease to 4.8%.

“On average, headline inflation should be 4.9% in 2024, supported by slowing global inflation, stable oil prices, a less depreciated Rand and subdued domestic demand.

“However, upside risks are material and the road ahead should still be bumpy,” they warn.