SA inflation slowed for the first time since January but economists warn that relentless rate hikes by international central banks, persistent rand weakness and higher domestic wage demands are likely to keep the Reserve Bank in a hawkish state of mind on Thursday when it makes its latest rate announcement.
Stats SA reported on Wednesday that inflation eased to 7.6% in August, declining from a 13-year high of 7.8% the previous month, after a big drop in fuel inflation.
The August outcome is also in line with market expectations and economists’ sentiment that inflation for the current business cycle reached its peak last month even though it remains well above the upper limit of the Reserve Bank’s 3%-6% target range.
Annual core inflation — which excludes prices of food, nonalcoholic beverages, fuel and energy — also surprised, falling to 4.4% in August, below market expectations of 4.6% and from a near five-year high of the same amount in the previous month.
But despite the downward trajectory, risks to the inflation outlook persist, especially after the rejection of government’s revised final offer of 3% by public service unions this week.
The unions, who represent more than 1.3-million SA public servants, are demanding inflation-beating increases at about 6%-7% — and Eskom has asked for another huge tariff hike of more than 32%.
The US Fed hiked its policy rate by 75 basis points (bps) on Wednesday evening, a move that will place further pressure on the rand.
The rand has been under severe pressure against the US dollar, depreciating from its best levels of R14.39 in March to a high of R17.81 in September, its worst level since April 2020. The rand strengthened slightly after the release of the inflation figures, but remains at a weak R17.7125, down almost 10% since the start of the year.
Nedbank chief economist Nicky Weimar said the dollar has benefited from the Fed’s “aggressive interest rate hikes” and growing fears that the world economy could slip into a recession on a combination of sticky global inflation, much tighter monetary policies, continued lockdowns in China, and energy shortages in Europe.
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“The Reserve Bank will therefore remain in a hawkish state of mind. We forecast another 75 bps hike for Thursday, followed by 50 bps in November,” Weimar said.
Stanlib chief economist Kevin Lings said under these circumstances, the Reserve Bank is expected to continue increasing interest rates, “especially considering the risk of second-round inflationary pressure in SA — including higher wages — as well as the broad-based rise in global interest rates.”
Investec chief economist Annabel Bishop said even though inflation was likely to start trending downwards, with September’s CPI inflation reading also expected to be below July’s as the petrol price declined a further R2.04/l in September after a R1.32/l cut in August, “a one-month dip doesn’t make up a trend of disinflation”.
“The Reserve Bank would remain concerned about persistently high inflation. The MPC spent 2016 to 2018 pushing inflation down to 4.5% year on year to anchor expectations and will act assertively to achieve this again,” she said.
Bishop said the repo rate may rise above 6.5% this year already, with a 75 bps increase on Thursday, “and possibly a 50 bps or another 75bp increase in November — and could even continue raising interest rates into next year”.
Stats SA data shows that prices eased mostly for transport and fuels. The cut in petrol prices was the main driver of the slowdown in headline inflation, with the petrol component falling to 43.2% on a yearly basis in August from 56.2% in July.
Most of the upward pressure on inflation came from a further acceleration in the prices of food and nonalcoholic beverages, which jumped to 11.3% from 9.7%, contributing 1.9 percentage points to the rise in headline inflation.
Lings said SA’s inflation rate is still expected to remain above 7% during the remainder of the year before slowing to an average of 5.6% in 2023, forcing the Reserve Bank to continue increasing interest rates.
“Unfortunately, the risk to inflation is still to the upside given a range of factors including trends in global inflation, recent increased demands for higher wages, a weaker exchange rate, the potential of a prolonged spike in agricultural and food prices, and upward pressure on administered prices,” Lings said.
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