Slight dip in inflation not enough for repo rate cuts this year?

Although the slight dip in inflation in March to 5.3% from 5.6% in February is welcome, it is not enough to trigger a cut in the repo rate this year as it is still too close to the upper band of the inflation target of the South African Reserve Bank of between 3% and 6%.

Inflation was not as sticky as initially thought, with the headline rate easing more than expected in March but risks remain firmly tilted to the upside with the annual inflation rate forecast to oscillate above 5% over the coming months before easing modestly from the fourth quarter of 2024, Jee-A van der Linde, chief economist at Oxford Economics Africa, says.

“The outcome was slightly lower than our expectation of 5.4% but the outturn for the first quarter of 2024 of 5.4% was on par with our forecast. For now, our average inflation forecast of 5.2% for 2024 remains intact.”

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Van der Linde says he expects rate cuts to start coming through gradually towards the end of 2024 only. “However, as expectations of early US rate cuts fade and with domestic inflation still showing some signs of stickiness, the odds of the South African Reserve Bank (Sarb) delaying rate cuts this year are increasing.”

He says prospects of a weak currency in the build-up to the elections, higher international oil prices and El Niño pose upside risks to South Africa’s inflation outlook.

More inflation rate decreases in coming months?

Frank Blackmore, chief economist at KPMG South Africa, says hopefully there will be more reductions in the inflation rate to come and this is expected. “However, geopolitical events, issues in the Middle East and transport routes, such as the Suez Canal and Red Sea routes are adding pressure to prices in all the economies and that might mean inflation remains higher for longer, with the result that interest rate reductions that were expected to start may be pushed later into 2024.”

Adriaan Pask, CIO at PSG Wealth, says the latest inflation rate reading supports the view that the Sarb could keep the repo rate steady at its next Monetary Policy Committee (MPC) meeting. “If inflation continues to tread around the target range, we believe the Sarb could also start to cut interest rates later this year.”

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Johannes Khosa and Nicky Weimar, economist at the Nedbank Group Economic Unit, say barring any new major shocks, they still expect inflation to moderate towards the Sarb’s 4.5% target over the next 12 to 18 months.

“As expected, inflation is proving sticky just above 5%, suggesting it could take longer to observe a compelling downward trend towards 4.5%. Our forecasts indicate that headline inflation will likely remain stuck around the 5.3% level over the next three months and only start to recede steadily, albeit slowly, from July onwards, dipping below 5% in September and ending the year at 4.6%.”

Inflation forecast to average 5% this year

They say over the full year, inflation is forecast to average 5%. “Therefore, our base case is for quite a patchy and slow deceleration in headline inflation despite the continued chokehold of restrictive monetary policy on already weak domestic demand. On top of this, the upside risks to our forecast remain elevated, increasing noticeably in recent weeks.”

These risks are that the crisis in the Middle East threatens to set off another spike in international oil prices and that inflation persists in the US. “The potential combination of sharply higher global oil prices and sustained rand weakness could result in another upward surge in domestic fuel prices and underlying operating costs, pushing headline inflation up by more than we currently anticipate. These adverse developments could further delay inflation’s descent toward 4.5%.”

Khosa and Weimar say today’s sticky inflation outcomes and amplified upside risks stemming from the adverse turn in the global landscape further validate the generally cautious and hawkish undertone adopted by the MPC at the March meeting.

“Consequently, we do not see much reason to change our interest rate forecast based on today’s inflation numbers. We still expect the MPC to hold interest rates unchanged for much of the year, with the first cut of 25 basis points forecast for September, followed by another 25 basis points reduction in November.”