Headline inflation continued on its downward trajectory in December owing to a sharp moderation in food and fuel inflation, which reached the lowest reading in four months.
But economists still expect no change at Thursday’s interest rate announcement by the Reserve Bank’s monetary policy committee (MPC), with some factoring in the start of the rate cutting cycle in May.
Stats SA on Wednesday said headline inflation fell to 5.1% in December from 5.5% in November and below market consensus of 5.2%. Inflation averaged 6% in 2023, above the Reserve Bank’s forecast of 5.8%.
Core inflation, which excludes volatile items such as food and nonalcoholic beverages, fuel and energy, remained steady at 4.5% in December aligning closely with market forecasts of 4.6%. But it averaged 4.8% in 2023 compared with 4.3% in 2022.
While the December headline inflation reading edges closer to the midpoint of the 3%-6% target range, where the Reserve Bank prefers to anchor expectations, FNB senior economist Koketso Mano warned that any government consumption impetus ahead of the national elections, as well as an anticipated worsening in risk sentiment and the exchange rate, would revive inflationary pressures.
“These factors necessitate caution when predicting the disinflation trend in the near term,” Mano said. FNB foresees headline inflation lifting temporarily in the first quarter, starting with 5.5% in January, as annual survey outcomes drive core inflation higher and some fuel price pressures are likely to build up from February.
Oxford Economics senior economist Jee-A van der Linde said the Bank will want clear evidence that inflation is sustainably reverting to the midpoint of the target band before it considers lowering interest rates.
“What’s more, SA’s monetary authorities are unlikely to cut rates ahead of the US Federal Reserve,” he said. “In general, policy easing in SA for 2024 is set to be less pronounced than in other emerging markets and advanced economies.”
In a media briefing, Alexforbes’ new chief economist, Mpho Molopyane, said this will not affect the Bank’s inflation outlook.
“It was widely expected that inflation will continue trending lower given developments in the international oil markets and so this number would not change the recalibration of interest rate expectations,” Molopyane said.
However, sticky core inflation and the second-round effects of this are “one thing” the Reserve Bank has worried about. “Another thing the Bank has started to worry about is that, historically, foreign exchange pass-through to inflation has been slow and low, but the Bank has started to see an increase. This could be a factor keeping core [inflation] at a higher level,” she said.
She said Alexforbes expects a total of 75 basis points (bps) in cuts in 2024, with 25 bps of this pencilled in for each meeting in the second half of 2024, bringing the nominal repo rate to 7.5% by the end of the year. “What we have taken into account is the SA risk premium, which we estimate at about 2.5%. So we do think that the nominal rate will have to stabilise at 7.5%,” she said.
Alexforbes expects GDP growth to average 0.6% for 2023 and 1.2% in 2024.
Stanlib chief economist Kevin Lings said, however, overall core inflation appears to be relatively well contained as it has been inside the Bank’s target range for the past 32 months and below 5% for the past six.
This suggests the underlying level of inflation remains well under control despite currency fluctuations, some upward pressure on wages, and higher energy, water and education prices, Lings said.
“Nevertheless, the Reserve Bank is likely to flag a range of concerns and risks at the MPC meeting. We expect the MPC to leave rates unchanged this week but reinforce the view that they appear to have peaked and that the focus of the monetary policy debate is now ‘when do we start to cut rates’.”
Stats SA data shows the moderation in headline inflation was mainly due to a slowdown in food and nonalcoholic beverages, which eased to 8.5% in December from 9% in November and transport, which printed at 2.6% compared with 4.3% in November.
On a monthly basis, there was no change in the headline consumer price index (CPI) from the previous month.
Standard Bank’s head of economic research, Elna Moolman, said Stats SA data shows the first tentative sign of the unwinding effect of the severe outbreak of avian flu in 2023, with egg prices falling 1.2% month on month after rising 38% from January to November 2023.
She said the MPC would be encouraged by another step closer to the midpoint of the target range.
“The Reserve Bank would specifically be encouraged by the still weak demand-pull inflation pressure, as reflected in weak rental inflation, core inflation remaining at the midpoint of the target range, and lower-than-expected food inflation,” Moolman said.
She, however, noted the Bank’s concern about the potential second-round effects of high food and fuel inflation.
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