Slight rise in inflation expected, yet no increase in repo rate

Economists expect a slight rise in the inflation rate for August on Wednesday due to an increase in the price of fuel, but that the Reserve Bank will keep the repo rate unchanged on Thursday. Increasing fuel prices are expected to push inflation up above 5% again.

The Bureau for Economic Research (BER) at Stellenbosch University expects a projected 0.3% increase in inflation for August compared to July due to an increase in transport component thanks to an increase in the petrol price of 37c per litre in early August, with diesel increasing by around 70c per litre.

“We expect only a modest monthly increase in food prices, which should drag the annual rate down towards 8%. In all, headline CPI is forecast to stabilise at 4.7% year-on-year.”

The BER expects that the Monetary Policy Committee (MPC) of the Reserve Bank (Sarb) will look past an expected near-term bump higher in headline inflation during September/October and keep the policy rate unchanged at a restrictive 8.25%, while likely highlighting upside risks to inflation, specifically due to the oil price and weaker rand.

The Nedbank Group Economic Unit says with the impact of last year’s high base fading, inflation will probably drift closer to 5% than the Sarb’s preferred 4.5% midpoint in the final months of this year, averaging 5.9% over the whole of 2023.

“Mild upward pressure will stem from higher fuel prices and rising domestic input costs due to the jump in electricity tariffs, the return of severe load shedding and continued rand weakness. We still expect food prices to fall further off a high base, contained by generally subdued global prices, weaker domestic demand and reasonably healthy stock levels.”

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MPC did enough to keep inflation in check

The economists at the unit say they believe the MPC has already done enough to ensure inflation’s return to the midpoint of the target range and expect the MPC to keep the repo rate steady.

“Although load-shedding, concerns over the potential impact of El Niño and the weaker rand pose upside risks to the inflation outlook, these mainly stem from the supply side of the economy. Demand-side pressures are highly unlikely to contribute.”

Elize Kruger, an independent economist, forecasts an inflation rate for the year of 4.8%, with food inflation moderating further on an annual basis to 8.5% year-on-year from 10% in July and transport inflation remaining in deflationary territory on an annual basis.

“However, this will be the last print below 5% for some time to come, as the nasty fuel price increases early September and more to come early October will push the near-term headline inflation numbers back to the 5.5% – 5.9% range for at least the next 4-6 months, before the downward trend should commence and gain momentum again.”

She warns that this is an unwelcome detour from the downward gliding path that the Sarb was anticipating and could result in one or two members of the MPC advocating for a further hike in interest rates, although she expects that the interest rate will remain unchanged at the current repo rate of 8.25%.

Absa’s economists also expect that the MPC will keep the repo rate unchanged but retain a cautious tone amid persistent upside risks to the inflation outlook. They forecast that the inflation rate reached 4.9% in August, up 0.2% from July.

“Despite the continued deceleration in headline inflation until July, near-term upside inflation risks increased since the last MPC meeting. Brent crude oil prices have risen by about 18.0% since the July MPC meeting while the rand has weakened by 2.1% in trade weighted terms. Some upward revision to the Sarb’s near-term inflation forecasts seems likely at this meeting.”

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Load shedding intensity will keep MPC concerned

The Absa economists also warn that the recent escalation in load shedding intensity will keep the MPC concerned about business mitigation costs as well as the risk of pass-through to consumer prices.

Frank Blackmore, lead economist at KPMG SA also expects that the repo rate will remain the same as the Sarb said it will depend on the data and the latest data on inflation was the July reading of 4.7%.

“We saw inflation was driven by two main components, housing and utilities, where the inflationary component was the increase in electricity prices that we saw in July. That inflationary component is still running at 14.7%, although housing and utilities is down to 5.1% in July in total.

“The other major component was food and non-alcoholic beverages with food as the main inflationary component. Sub components are still climbing well above 10%, such as vegetables 18.5%, sweets, sugar and desserts at 18.7%, milk, cheese and eggs 14.4%, bread and cereals at 13.1%.”

If these increases moderate over the coming months, it will allow the Sarb to take a breather on rate hikes, depending on what the rest of the world does in this regard.

“August inflation can potentially be slightly higher but I do not think that will cause any alarm. I think the trend of inflation we have seen is coming down from the highs of 7.8% registered in July last year to the current 4.7%.”

Tertia Jacobs, treasury economist at Investec points out that some upside risks to the inflation outlook have reasserted themselves, including an increase in the oil price and the depreciation of the rand.

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Deceleration in inflation not sustainable

She says the deceleration in headline inflation in July 2023 to 4.7% is, therefore, not sustainable. The inflation rate for August’s is forecast to increase to 4.8%, according to Bloomberg. Investec Corporate & Institutional Banking (ICIB) forecasts an increase of 5.0% as property taxes, which are measured in July, will only be included in August’s survey.

“The petrol price could increase by around 14.5% by October from July and diesel by around 30% from June to September. The difference in price increases can be ascribed to the difference in the supply of petrol and diesel in international markets.”

Jacobs says the MPC is expected to keep rates on hold this week with several focus points, including the distribution of the votes between the five MPC members. “With the balance of risk assessment likely to remain to the upside, we believe the decision not to hike could be seen as a hawkish pause, implying a potential voting distribution of 4-1, with four members voting to keep rates on hold and one member in favour of an increase of 25 basis points, although the real inflation-adjusted policy rate of -3% argues against this.”