Massive problem for interest rate cuts in South Africa
Inflation expectations in South Africa may have dropped, but they are still above the South African Reserve Bank’s (SARB) target, meaning that interest rate cuts may be harder to implement.
According to the Bureau for Economic Research’s (BER’s) latest survey of inflation expectations for the second quarter of 2024, analysts, business people and trade union officials have lowered their CPI inflation forecast for the entire three-year horizon.
They expect inflation to average 5.3% in 2024, 5.0% in 2025, and 4.9% in 2026.
This marks a downward adjustment of 0.1 percentage point (% pt) for this year and 0.3% pts for the following two years.
The adjustment follows the slowing of inflation from 5.6% in January to 5.2% in May.
“The five-year inflation forecast fell below 5% for the first time since the fourth quarter of 2021,” said the BER.
“However, among the three social groups, only analysts anticipate a drop below 5%, though all three lowered their respective forecasts compared to the first quarter.”
One year ahead, households’ inflation expectations continued to trend lower. They reached 6.1%, far below the recent peak of 8.1% a year ago.
Five-year-ahead inflation expectations also edged down, from 10.4% to 9.7% – the first reduction in three quarters.
The results of the inflation expectations survey are one of the numerous factors that the SARB’s Monetary Policy Committee (MPC) considers when deciding on interest rate cuts.
“The MPC will be concerned if inflation expectations increase, inflation expectations are significantly above the midpoint of the inflation target range of 3% to 6% and/or the other inflation indicators deteriorate,” said the BER.
“Rising inflation expectations may, for example, lead to higher wage demands as workers feel they need to be compensated for the higher expected inflation in future. Businesses may adjust their price increases upwards if demand is robust enough.”
“To prevent higher expectations from becoming a reality, the SARB may be forced to increase the interest rate. The opposite happens if inflation expectations and other indicators decline.”
Although average inflation expectations for this year have decreased to 5.3%, this is still well above the SARB’s midpoint target of 4.5%
However, in a note this morning, the BER said it expects the current downward trend in inflation to be maintained.
Economists and analysts also have different expectations about when the SARB will eventually cut the repo rate from its current 15-year high of 8.25%.
Nedbank’s economists expect 25 basis point cuts in September and November, while Investec Chief Economist Annabel Bishop expects the first 25bps cut will occur in November.
Bank of America’s prediction is even worse. It only expects the first cut in January 2025, with a cumulative 100bps in January, March, May, and July.
BofA said that it is improbable for the SARB to cut before the US Federal Reserve, which is only expected to cut in December 2024.
Economic Growth
Returning to the inflation expectations survey, the three groups only expect GDP to increase by 0.8%, slightly below economists’ consensus expectations.
However, it is expected to increase to 1.3% in 2025, slightly improving from the 1.1% in the first quarter.
That said, salaries and wages are only expected to increase by 4.9% in 2024 and 2025.
With inflation expected to be higher in these periods, respondents thus expect salary decreases in real terms.
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