Good news keeps coming for inflation and interest rates in South Africa

Inflation expectations across South Africa have declined, which adds even more weight to the widely expected interest rate cuts next week.

According to the Bureau for Economic Research’s (BER’s) latest inflation expectation survey, analysts, business people, and trade unions’ average inflation expectations dropped in Q3 2024.

Overall, they expect headline inflation to be 5.1% in 2024 before subsidising to 4.8% in both 2025 and 2026.

In Q2 2024, they expect consumer inflation to register 5.3% in 2024 and fall to 4.9% in 2026.

Analysts expect the lowest inflation rate among the three social groups over the entire forecast horizon, but trade unions are not far behind.

Business people still believe that inflation will remain over 5% over all three years, dropping from 5.4% in 2024 to 5.2% in 2026.

“Overall, the three social groups expect inflation to average 4.8% over the next five years. This is
slightly lower than the 4.9% they expected before,” said the BER.

“However, in this case, only analysts expect a rate close to the target of 4.5%; trade union officials foresee a rate around 5%, similar to business people.”

“Household inflation expectations turned significantly higher during the third quarter survey,
ending the downward trend that started in the middle of 2023.”

One-year-ahead expectations also increased from 0.6% points in 2024 to 6.9% over the next year, while five-year-ahead expectations increased by 0.9% points to 10.6%—the highest level since Q2 2023.

In Q3, the three social groups still expect GDP growth to be below 1% in 2024.

That said, they revised their forecast for next year up by 0.2% pts to 1.5%.

Trade unions have also massively revised their wage increase forecast, expecting wage increases to rise by 5.6% in 2024 and 5.9% in 2025.

Moreover, the average forecast for 2025 increased slightly from 4.9% to 5.0%, while 2026 increased from 4.9% to 5.3%.

The results of the inflation expectations survey are one of many factors considered by the South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) when making interest rate decisions.

The MPC is typically concerned if inflation expectations are significantly above the midpoint of the inflation target range of 3% to 6%.

Rising inflation expectations also tend to lead to higher wage demands as workers feel they need to be compensated for the higher inflation.

Businesses may also adjust their price increases upwards if demand is strong 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,” said the BER.

Although inflation expectations are still above the SARB’s target of 4.5% in 2024, the MPC is widely expected to cut interest rates when it meets next week.

Inflation has subsided recently, dropping from 5.1% in June to 4.6% in July – the best level in three years and 0.1% above the SARB’s target midpoint.

Speaking at a recent media luncheon, Deputy Governor Fundi Tshazibana said that headline inflation could hit 4.3% in 2024.

Although the central bank said it will remain cautious due to volatility in fuel and food costs, the improved inflation outlook means that the repo rate should be cut from its 15-year high of 8.25%.

Moreover, the rand has strengthened in recent months against the US dollar.

The US is also widely expected to cut interest rates when it meets amid weak job numbers and improved inflation figures, which will allow the SARB to cut rates without impacting the interest rate differential.

Standard Bank, Nedbank, Investec, FNB, Bank of America, and the BER expect the MPC to cut the repo rate by 25 basis points in September, with more cuts expected.

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