Inflation blow for South Africa – bad news for interest rates

 ·20 Mar 2024

Inflation for February 2024 came in higher than anticipated by many economists, putting a damper on hopes that the South African Reserve Bank (SARB) will consider cutting interest rates any time soon.

According to Stats SA, annual consumer inflation quickened in February, rising to 5.6% from 5.3% in January and 5.1% in December.

Market expectations were for a flat to marginally higher print (5.3%-5.4%), with only outliers anticipating anything higher.

Stats SA said that the product categories that drove much of the upward momentum included housing & utilities, miscellaneous goods & services (most notably, insurance), food and non-alcoholic beverages (NAB) and transport.

As predicted by the Bureau for Economic Research (BER) the 10.3% month-on-month increase in medical aid premiums (in the miscellaneous goods & services category) played a big role – pushing the annual rate for health insurance to 12.9%.

Premiums for all types of insurance have increased by 9.5% over the past year.

Positively, inflation for food & NAB slowed to 6.1% in February. Most categories recorded lower annual rates, except for hot beverages and oils & fats.

The rate for hot beverages was driven higher by annual price increases for instant coffee (up 12.1%), black tea (up 10.1%) and Rooibos tea (up 8.1%).

The rate for oils & fats remained in negative territory, mainly due to a 12.9% annual decline in the price of sunflower oil. However, the fall in prices did not extend to peanut butter, which has increased in price by 14.0% since February 2023.

The lingering impact of rising egg prices continues to affect the milk, eggs & cheese category, with eggs 30.7% more expensive than a year ago. Although the current average price of a tray of six eggs (R25.48) is down from its peak in December 2023 (R25.85), it is higher than the February 2023 price tag (R21.13).

Annual rice inflation increased further to 25.0% in February from 23.8% in January. A bag of rice (1 kg) would have set you back R31,83 in February, sharply up from R23.54 a year ago.

Pizza & pies – also classified with rice in the bread & cereals category – have seen sharp price increases, too, rising by 17.5% in the 12 months to February.

Not all was bad news in the bread & cereals category, however. Several products are cheaper than a year ago, including bread flour (down 5.7%), rusks (down 2.7%), ready-mix flour (down 2.2%), pasta (down 2.1%) and macaroni (down 0.5%).

However, the impact of rising fuel prices was evident in the data. The transport category registered an annual increase of 5.4%, driven higher mainly by increases in vehicle and fuel prices.

Interest rate woes

The higher-than-expected inflation print will continue to feed the ‘higher for longer’ narrative around interest rates.

The SARB’s Monetary Policy Committee will be meeting next week to determine the next move for rates, with analysts expecting another hold.

While higher inflation is a major factor – with SARB governor Lesetja Kganyago making it clear that the bank won’t change policy until inflation is sustainably at 4.5% – the resistance to cut rates in the US is also at play.

Markets were hoping for an early start to a rate-cutting cycle in 2024, initially pencilling in cuts by the US Fed in March. However, the tone has shifted significantly, with the first cuts only expected in the second half of the year – likely around July.

For South Africa, which takes policy direction from the US, this means that rate cuts are only expected after that, possibly only in September.

However, if inflation does not turn and ease back to the mid-point of the SARB’s target range, then even this is in doubt.

March is likely to be another month of inflationary pressure due to the massive R1.20 per litre hike in fuel prices that kicked in at the start of the month.

Read: When South Africa should finally catch a break

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