Global Courant
With consumer price inflation (CPI) coming down faster than expected in May, South Africa’s cycle of rate hikes could finally come to an end, said Annabel Bishop, Investec’s chief economist.
Commenting on the latest inflation figures, Bishop noted that the nominal rate of 6.3% was below market expectations of around 6.5%.
This indicates that inflation is declining faster than previously expected and puts pricing on track to reach the mid-level of the South African Reserve Bank’s 3% to 6% range in 2024.
While inflation is currently expected to average 6% in 2023, Bishop said faster disinflation in the coming months could lead to a drop below that level to around 5.7%.
Inflation remained lower in May despite an increase in gasoline prices. Fuel prices fell as much as 74 cents per liter in June, likely leading to a good CPI print for that month. Fuel prices are also currently on track for a small cut in July, Bishop said.
“The Reserve Bank is likely to welcome the decline in CPI inflation, but cautiously as core inflation has risen to 5.4% year on year,” she said.
Core inflation — excluding food and fuel — registered a slight broadening of price pressures, the economist noted, pointing to some fundamental inflationary pressures. However, since the Reserve Bank’s focus is on headline inflation, it probably won’t weigh too much on the SARB’s policy decisions, she said.
Adding to the positive outlook, the Rand also pulled back from R20.00/USD to around R18.30/USD earlier this month, gaining slightly on better-than-expected CPI inflation data.
Bishop noted that with the implied point in the SARB model of R18.68/USD, and a lower rand exchange rate now, “gains in the US dollar are also likely to be positive for the SARB’s inflation forecast, and thus its monetary policy decisions.” . ”.
Given this positive data, Bishop said Investec’s baseline is that the Reserve Bank will hold interest rates when it next meets in July, and likely hold until it starts cutting at the end of the year or early next year.
“Looking ahead, South Africa’s financial markets, as indicated by the Forward Rate Agreement
curve, have factored in another 25 bps hike in the current interest rate cycle – at the end of the year – but we think
this is currently unlikely, and that SA has reached its final rate in the current cycle,” she said.
“The curve also indicated the likelihood of a SA repo rate cut of 25 bps by the end of next year, if not
not until 2025, but likely sooner to avoid SA monetary policy becoming restrictive
as inflation falls towards 4.5% y/y.”
While Investec is more optimistic, other economists are not so optimistic.
Economists at Nedbank said CPI pressures probably wouldn’t be enough to convince the Reserve Bank to hold rates for now, as the bank expects another 25 basis point hike in July.
“Given the many uncertainties surrounding the inflation outlook, especially the fringe’s murky outlook amid ongoing geopolitical risks and hints from the US Federal Reserve of further rate hikes, the Reserve Bank is likely to remain aggressive. We still expect a rate hike of 25 basis points in July,” the bank said.
The Reserve Bank has raised interest rates by 475 basis points in ten consecutive meetings since November 2021.
Read: Good news for households in South Africa as inflation eases more than expected
