SA could hit Reserve Bank’s inflation target sooner than expected: economist
While local inflation is still above the upper limit of the South African Reserve Bank’s (SARB) target range of between 3% to 6%, economists expect it to start decreasing as rising interest rates take effect.
Adriaan Pask, the CIO at PSG Wealth, said that the country’s inflation levels should reach the target range in the second half of this year, and current data supports this expectation.
On Wednesday (21 June), StatsSA reported that inflation dropped to its lowest level in 13 months, standing at 6.3% year-on-year in May.
This decline was attributed to smaller rises in the prices of food and fuel. The decrease from the previous month’s rate of 6.8% exceeded expectations.
Consumer inflation in South Africa was reported at 0.2% – lower than the anticipated rate of 0.4%, as predicted by analysts.
Moreover, core inflation, which excludes the prices of food, non-alcoholic beverages, fuel, and energy, stood at 5.2% year-on-year in May, slightly down from 5.3% in the previous month.
The softer – but still impactful – inflationary pressure for consumers is ‘cost-push’ inflation, said Professor Daniel Meyer, an economic specialist at the University of Johannesburg.
“Cost-push inflation occurs when the general price level increases due to a rise in private-sector production costs. Businesses primarily aim to make a profit; therefore, if production costs increase, so does the price of goods and services.”
“Cost-push inflation is therefore driven up by production factors and input costs, including increases in energy costs (load shedding has a massive impact on production costs); government taxes and policy uncertainty; municipal costs relating to rates and taxes; supply chain processes and logistics; and an increase in wages,” he said.
This comes after the SARB has increased interest rates ten times since the start of the rate cycle in November 2021 – totalling 475 basis points.
The next rate decision is set for July.
According to Investec’s chief economist, Annabel Bishop, a 25 basis point hike has been priced in for the end of the year; however, she thinks it is currently unlikely.
The economist added that South Africa may have reached its terminal interest rate in the current cycle.
Taking into account the Forward Rate Agreement curve (a contract that determines the rate of interest to be paid in the future), Bishop said that it also indicated the likelihood of a 25 basis point cut in the repo rate by the end of next year, if not only in 2025.
“But this is likely to occur earlier to prevent South Africa’s monetary policy from becoming restrictive as inflation falls towards 4.5% y/y,” she said.
As reported by Reuters, Jason Tuvey, an economist at Capital Economics, echoed the view that the central bank’s tightening cycle was over and that interest rates would be kept at 8.25% next month.
Casey Delport, an investment analyst at Anchor Capital, also said inflation was beginning to show signs of abating, but risks remained linked to the country’s power crisis.
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