Despite the slight moderation in consumer prices in March, economists say it is becoming increasingly unlikely inflation will dip below 5% during the first half of the year.
The likelihood of the central bank initiating rate cuts at midyear (about July) is thus shrinking, with some economists expecting interest rate cuts to only occur from September or even later this year.
This is unwelcome news for indebted South Africans, who have seen borrowing costs surge 475 basis points (bps) since November 2021, bringing the repo rate to a 14-year high of 8.25%, where it has remained since May 2023.
Stats SA reported on Wednesday that consumer prices eased slightly and for the first time in 2024 to 5.3% in March, down from 5.6% in February. On a month-on-month basis the consumer price index (CPI) increased 0.8% in March.
The headline inflation rate was broadly in line with analysts’ expectations of 5.4%, and it supported expectations that inflation would gradually edge closer towards the 4.5% midpoint of the central bank’s target range of 3%-6% later in 2024.
The main contributors, said Frank Blackmore, lead economist at KPMG SA, were “unsurprisingly” housing and utilities, with the cost of electricity increasing as well as water and other services related to housing and utilities.
“Miscellaneous goods and services contributed 1.2%, including items such as personal care, and insurance with an inflation rate of close to 10%,” Blackmore said.
The third-largest contributor to inflation in March was food and nonalcoholic beverages, which contributed 0.9%. After the increase in fuel prices earlier this year, transport was the fourth-largest contributor.
Adding pressure
Core inflation, which excludes items such as food, fuel and energy, was slightly down, from 5% in February to 4.9%.
“Hopefully, there will be more reductions to come. However, geopolitical events, issues in the Middle East, as well as with transport routes — the Suez Canal, the Red Sea routes and so on — are adding pressure to prices within all the economies and that might mean inflation remains higher for longer, meaning that interest rate reductions ... may be pushed later into 2024,” Blackmore said.
Nedbank economists Nicky Weimar and Johannes Khosa said that barring any major shocks they still expected inflation to moderate towards the SA Reserve Bank’s 4.5% target over the next 12-18 months. But headline inflation might remain stuck at about 5.3% over the next three months and only start receding from July to dip below 5% in September and end the year at 4.6%.
They expected inflation for the year to average 5%, in line with the Bank’s most recent forecast.
Weimar and Khosa said Nedbank maintains its expectation the monetary policy committee (MPC) will hold interest rates unchanged for much of the year, with the first cut of 25 bps forecast for September, followed by a similar reduction in November.
A recent survey by the Bureau for Economic Research (BER) shows inflation is likely to average 5.4% in 2024, down from 6% in 2023. The BER expected the slight moderation in headline CPI in March and said inflation most likely peaked in February.
Peak inflation
“However, persistent upside pressure means the CPI could remain sticky and only dip below 5% in the second half of the year,” the BER said.
BER chief economist Lisette IJssel de Schepper told Business Day the March inflation numbers came in slightly below their expectations, confirming expectations that February’s print was likely the peak of inflationary pressure in 2024.
But, she said, this data release was unlikely to sway the Bank, which tended to focus on forward-looking data.
“We expect the [Bank] to implement its first rate cut in September. We see an extended pause once the repo rate reaches 7.25% — implying 100 bps of cuts in total.
“While the [Bank] does not follow the major global central banks slavishly, the increased likelihood that the US Federal Reserve will delay its first interest rate cut amid sticky inflation does mean that the [Bank] may also postpone its first cut,” she said.
Jee-A van der Linde, senior economist at Oxford Economics Africa, agreed that the drop in the inflation rate in March was insufficient to trigger early rate cuts.
“We retain our average inflation forecast of 5.2% for 2024 and expect rate cuts to start coming through gradually towards the end of 2024 only.
“As expectations of early US rate cuts fade, and with domestic inflation still showing some signs of stickiness, the odds of the [Bank] delaying rate cuts this year are rising,” he said.
Retail sales
Stats SA also released retail trade sales data for February on Wednesday indicating a fall of 0.8% year on year, after contracting by 2% in January.
There was some improvement on a month-on-month basis, with retail trade sales rising 0.4% in February, after a sharp 3.2% decline in January.
The largest negative contributor to the 0.8% decrease was retail in textiles, clothing, footwear & leather goods.
“Seasonally adjusted retail trade sales dipped 0.5% in the three months ending February compared with the preceding three months, indicating that consumers are increasingly feeling the pressures of high prices for goods and services and tight monetary policy,” said Van der Linde.
Consumers, he said, were despondent about economic conditions and hesitant to buy more expensive durables as high living costs and elevated interest rates erode households’ purchasing power.
“We do not foresee any meaningful improvement for the SA economy in the near term as structural constraints, with a high-cost environment, weigh on growth prospects,” he said.
Update: April 17 2024
This story has been updated with new information and comment.
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