South Africa’s inflation outlook improving but risks remain

South Africa’s inflation outlook is improving, but risks remain and so far it has not dropped enough to trigger early repo rate cuts, economists say after the inflation rate dropped to 5.2% in April from 5.3% in March and 5.6 in February.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the favourable inflation print signals that interest rate cuts are gently heaving into sight. “However, headline inflation is proving sluggish to return to the coveted 4.5%, while several risks to the inflation outlook remain. Therefore, we expect that monetary authorities will be cautious and only start lowering the repo rate from the fourth quarter of 2024.”

Headline inflation is gradually reverting to the midpoint of the South African Reserve Bank’s (Sarb) target band of 3% to 6%. Van der Linde says the outcome was slightly lower than Oxford Economics Africa’s expectation and the consensus forecast of 5.3%.

The main contributors to the April annual inflation rate were housing and utilities (+5.8%), miscellaneous goods and services (+7.2%), food and non-alcoholic beverages (+4.7%) and transport (+5.7%).

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Core inflation expected to remain steady

Core inflation, which excludes volatile items such as food, non-alcoholic beverages, fuel and energy, decelerated broadly in line with Oxford Economics Africa’s expectations to 4.6% in April from 4.9%.

“We expect core price inflation to remain steady in the second quarter and ease gradually thereafter. The latest data also shows that goods inflation was unchanged at 5.7% in April, while annual services inflation dropped to 4.6% from 5.0%.”

Van der Linde says Oxford Economics Africa retains its average inflation forecast of 5.2% for 2024, but stronger disinflation over the coming months could bring the average closer to 5%.

“However, we have revised the interest rate forecast to reflect only one 25 basis points repo rate cut in 2024, compared to the previous forecast of two 25 basis points cuts, one in the third quarter and one in the fourth.

“With domestic inflation coming down only slowly, monetary authorities will likely err on the side of caution before committing to cut the country’s repo rate. In addition, South Africa’s interest rate outlook is also informed by recent revisions to our baseline for the US, which is for the first rate cut by the Federal Reserve to occur in September followed by another in December.”

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Inflation expected to remain sticky

Economists at the Nedbank Group Economic Unit, Johannes Khosa and Nicky Weimar, say they expect inflation to remain sticky at around 5.2% during the second quarter. “The moderation in food prices will likely slow as the impact of last year’s favourable base fades, the rate of decline in global food prices slows and the effect of drier weather conditions this summer starts to filter through the supply chain.”

They also expect fuel prices to exert mild upward pressure, with the unfolding geopolitical conflicts preventing a faster decline in global oil prices. The disinflation process will likely pick up pace around the fourth quarter, they say, with headline inflation forecast to end the year at around 4.6%, averaging 5.1% over 2024 as a whole.

“However, there are still upside risks to our forecast. On the global front, the conflict in the Middle East could trigger another spike in international oil prices. Locally, the rand is a significant concern. The local unit has been remarkably resilient recently but will likely come under renewed pressure around election time.”

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Rand remains vulnerable to any abrupt shift in risk sentiment

They warn that the rand also remains vulnerable to any abrupt shift in global risk sentiment, which still depends on US inflation outcomes and its implications for the much-awaited easing in US monetary policy.

“Today’s inflation outcome is encouraging. However, the Sarb will likely remain cautious, waiting for a clear downward trend towards the 4.5% midpoint and for the upside risks to the inflation outlook to subside. We expect the Monetary Policy Committee (MPC) to leave interest rates unchanged next week, with the first cut of 25 basis points forecast for September, followed by another in November.”