Where to next for interest rates after South Africa’s latest inflation shock

 ·22 Nov 2023

South Africa’s latest headline inflation figure surprised markets by climbing higher than economists expected – but the South African Reserve Bank (SARB) is unlikely to hike interest rates when it meets tomorrow.

Inflation jumped from 5.4% in September to 5.9% in October – higher than the market expectations of between 5.4% and 5.7%. The month-on-month increase of 0.9% was the most significant change in consumer inflation in three months.

Inflation is now at the upper end of the SARB’s target range of 3% to 6%.

The increase was mainly due to the increase in higher food price inflation – primarily due to the panic buying of chicken and eggs, with inflation for food and non-alcoholic beverages (NAB) climbing from 8.1% in September to 8.7% in October.

Egg prices jumped by 13.4% from September, pushing the annual rate to 24.4%. The prices for poultry-related products were highly affected by the avian flu outbreak, resulting in the culling of millions of chickens.

Transport inflation also jumped from 4.2% in September to 7.4% in October – this rise was primarily due to the 6.5% monthly increase in the fuel price.

This price of inland 95-octane petrol rose from 24.54 per litre in September to R25.68 per litre in October – the second-highest price ever.

However, November saw a large petrol price cut of R1.78/litre, exerting downward pressure on the inflation outcome. A roughly R1.00 petrol price cut is also lined up for December, bringing further relief to inflationary pressures.

The MPC meets tomorrow to make its interest rate decision and will likely have a hawkish tone, although on balance, should keep interest rates unchanged,” Investec’s Annabel Bishop said.

“The MPC’s last meeting forecast CPI inflation at 5.9% y/y for 2023 and 5.1% y/y for 2024, and today’s figure is unlikely to change its 2024 view, with the SARB currently mainly targeting inflation in 2024.”

This sentiment was echoed by Nedbank, which said that, since monetary policy is forward-looking, October’s inflation print should have an immaterial effect on the MPC’s decision.

“We still believe the SARB has done enough to contain inflation and ensure a sustainable return to the 4.5% target. This is evident in weaker domestic demand, slower household credit growth, and rising debt defaults,” it said.

“We acknowledge the various upside risks to the inflation outlook; however, we maintain that diminishing consumer demand will offset these risks. Therefore, we expect the SARB to leave interest rates unchanged tomorrow and start a mild easing in 2024.”

Read: Petrol prices and panic sends inflation shooting up in South Africa

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