South Africa inflation numbers likely to moderate by the end of the year: economists

 ·20 Jul 2022

South Africa’s latest inflation numbers are likely the peak in the current cycle, and the figures are expected to moderate towards the end of the year, Nedbank economists said in a research note on Wednesday (20 July).

The bank was commenting on Statistics South Africa’s latest consumer price index, which shows inflation was recorded at 7.4% in June 2022, up from 6.5% in May 2022. The June rate is the highest reading since May 2009 (8%) when the economy faced the headwind of currency depreciation during the global financial crisis.

“The acceleration in inflation in June was exaggerated in part by the fact that it was a survey-heavy month. Inflation is probably close to peaking in the current cycle. It will remain elevated in July, mainly due to another high increase in the petrol price (10.6% month on month),” Nedbank said.

“After that, it is likely to start moderating gradually off a high base to end the year around 7%. Furthermore, there have been signs of moderation in international food and crude oil prices in recent months, and global supply chain pressures have receded slightly after China relaxed Covid restrictions.”

Nedbank now forecasts CPI to average 6.8% in 2022, up from 6.5% previously and 5.5% in 2022. However, risks to the outlook remain to the upside, the bank said.

“The rand has come under pressure in a ‘risk-off’ environment and aggressive interest rate hikes by the US Federal Reserve,” it said.

“Given the accelerating tightening of global monetary policy, the uncertain outlook for the rand, and the need to bring inflation below the upper end of the target range, we believe that the SARB will hike interest rates by 50 basis points tomorrow and in September before scaling down the margin of the hikes to 25 basis points in November. This will lift the repo rate to 6% and the prime rate to 9.5% by the end of the year,” Nedbank said.

FNB is less optimistic with its forecasts, with the bank expecting inflation to peak later in the year and at a higher average level. A more tentative outlook was also expressed by investment group Schroders, which said that the South African data points to a delayed peak in Emerging Markets.

“Headline inflation is expected to remain elevated for the remainder of the year, reaching a peak in the fourth quarter,” said FNB economist Koketso Mano. “For the year, we anticipate headline inflation to average 7.2%, driven by fuel and food inflationary pressures.”

Both petrol and diesel prices rose by over R2 per litre in July and should exert upward pressure to the upcoming inflation print, adding to persisting food price pressures, she said. In addition, the survey of municipal increases will appear in core and electricity inflation.

“Beyond the next CPI data, lower Brent crude oil prices have outweighed the weaker rand, and the current month-to-date over-recovery in the petrol price is over R1.40 per litre. However, the potential cut to fuel prices would be mitigated by the lapse of the remaining 75c general fuel levy relief in August, and Brent crude oil prices continue to be supported by supply constraints.”

The surge in inflation should result in higher surveyed inflation expectations in the latest survey results scheduled for publication tomorrow, Mano said.

“The likely lift in expectations, alongside higher market inflation forecasts, as well as a more aggressive US Fed should place further upward pressure on local interest rates. The MPC is broadly expected to hike by 50bps points tomorrow, bringing the level of the repo rate to 5.25%.

“Some analysts expect a hike of 75bps, which would bring the repo rate to 5.50%. Despite the front-loading of interest rate hikes, the repo rate remains below the end-2019 level of 6.50%, but we expect it to return to that level within a year.”

Predictions from Finder’s panel of 26 economists point to a 50 basis point hike being the most likely, with the majority (88%) of experts pencilling this in.

A Reuters poll of 23 economists also showed wide expectations that a 50bp hike will be announced. 19 of 23 economists expected a half-point hike to 5.25%, with the other four forecasting a 75bp increase.

The poll found a median 65% probability of a 50 basis point rise and 35% chance of 75 basis points.

Read: Inflation hits 13-year high in South Africa – here are 8 things that are much more expensive

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