SA headline inflation cooled to its lowest reading in 20 months, falling back within the Reserve Bank’s 3%-6% target range, further supporting the view the Bank might keep the repo rate steady on Thursday.
But economists warn recent developments may not be enough to stop another hike.
These include the higher-than-expected inflation expectations in the second quarter, as well as the recent sharp currency depreciation that could lead to wage-price spirals that together may hold stronger than the fall in the consumer price index (CPI) to 5.4% in June from 6.3% in May as reported by Stats SA on Wednesday.
Stats SA data shows that the sharp slowdown in headline inflation was mainly driven by fuel and food inflation, largely reflecting strong base effects. Data shows fuel inflation fell to 8.3% year on year in June from 3.5% in May, effectively shaving 0.6 percentage points off headline CPI inflation.
Absa senior economist Miyelani Maluleke said Absa expects the combination of the drop in fuel prices and base effects to push fuel inflation down even more in July, contracting 16.7% and reducing the direct contribution of this category to headline inflation by a further 0.6 percentage point.
Sanlam Investment chief economist Arthur Kamp said while the latest CPI figures confirm that disinflation (a temporary slowing in inflation) is under way, and core inflation has moderated to 5% from 5.2%, it remains difficult to assess which direction the Bank’s monetary policy committee will take.
Increasing inflation expectations are likely to “still concern” the Bank’s monetary policy committee members, Kamp said.
He said first-round import price increases, which could filter in through petrol prices as the rand depreciates for example, could prompt workers to demand higher wages, causing more price increases.
These factors, with increased production costs, could lead to damaging wage-price spirals “if left unchecked”, Kamp said.
While the monetary policy committee may take note of further increases in inflation expectations as reported in the survey of the Bureau for Economic Research (BER) at Stellenbosch University of inflation expectations for the second quarter — and specifically inflation expectations of trade unions, which remain elevated at 6.6% and 6.2% for 2023 and 2024 respectively — the survey also notes a moderation in trade unions’ wage expectations since the first quarter. This is a sign of a limited wage spiral, he said.
“Considering this, and given little, if any, expected real GDP growth in 2023, while real credit extension is palpably weak, there is a strong argument to pause at this monetary policy committee meeting,” Kamp said.
Absa’s Maluleke also sees Wednesday’s inflation numbers as supportive of their expectation that the committee will keep the repo rate on hold.
Stanlib chief economist Kevin Lings said the outcome is likely to be close but he expects the committee to keep rates on hold, a move that would signal the top of the current interest rate cycle.
Lings said while upside risks to inflation remain, these appear to have been largely contained, helped by the recent hikes in SA interest rates.
“This coupled with an improved outlook for global inflation and interest rates, most especially in the US, the Reserve Bank could afford to keep rates on hold this week, but signal that they will remain alert to the upside risks. Rate hikes could resume if inflation does not continue to moderate,” Lings said.
But some expect the committee, which has hiked rates by 475 basis points to 8.25% since it began tightening monetary policy in November 2021, including an aggressive 50 basis points in May, to increase rates 25 basis points on Thursday. This is also in line with nine of the 21 analysts polled by Reuters who submitted forecasts for this week’s monetary policy committee meeting.
Close call
Anchor Capital investment analyst Casey Delport expects the Bank to hike the repo rate 25 basis points this week despite the positive news stemming from the latest inflation print as the monetary policy committee will remain concerned by the ever-present rand-negative risks at play within the SA economy.
Standard Bank also pencilled in a 25 basis points rate hike and added that not only will the decision be a close call, but there is a possibility that the bank will pause instead.
“Notwithstanding relief about the rand’s recent gains, the Bank will not necessarily assume that this will be enduring, given persistent rand-negative risks,” head of macroeconomic research at Standard Bank Elna Moolman said.
Nedbank changed its earlier stance from a 25 basis points hike to no change.
Nedbank senior economist Johannes Khosa said that before the release of the inflation print on Wednesday, they expected one last 25 basis points rate hike on Thursday given the uncertainties about load-shedding and the rand. However, Wednesday’s numbers “strengthen the case for no further hikes”.
The better-than-expected outcome comes “on top of the rand’s pullback to below R18 to the US dollar, a faster deceleration in US inflation, and more evidence of slowing global and domestic demand”, Khosa said.
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