Consumer inflation slowed for the third month running, beating expectations and falling below the SA Reserve Bank’s midpoint target, adding further impetus for the Bank to lower rates on Thursday.
According to Stats SA, which published the August inflation data on Wednesday, inflation fell to 4.4% in August from 4.6% in July, the lowest print since 2021.
Economists reacted to the August data saying inflation dipping below the Reserve Bank’s midpoint target of 4.5% earlier than expected should provide further impetus for its monetary policy committee to lower rates this week.
In August, lower annual inflation rates were recorded for several product groups, most notably transport (as a result of recent fuel price cuts) and housing, Stats SA said. In contrast, inflation for food and nonalcoholic beverages edged higher in August.
Lower fuel prices were a key contributor to moderating the rise in the cost of living in the second and third quarters, and this was likely to continue at the start of the fourth quarter given an expected R1.25/l drop in the petrol price in October, said Investec chief economist Annabel Bishop.
FNB senior economist Koketso Mano said headline inflation could fall below 4% in September as weak demand kept core inflation contained and falling fuel prices supported lower transport costs.
“Furthermore, the dollar-rand exchange rate has moved even closer to the estimated fair value of R17.50, supporting lower imported price pressures across the board. With just an update of data, we could see inflation averaging 4.5% this year and falling closer to 4% next year,” Mano said.
The monetary policy committee will announce its repo rate decision for September on Thursday. It is widely expected to cut rates by 25 basis points (bps) to 8%.
“A potential interest rate cut by the US Fed, weak domestic activity, less pessimism on the policy trajectory in SA and lower marketwide inflation expectations suggests that there is ample space for the Bank to cut interest rates,” said Mano.
Jee-A van der Linde, senior economist at Oxford Economics, said the improvement in SA’s inflation outlook would make it difficult for the Bank to justify holding rates steady this month, especially if the Fed cut interest rates as expected.
In July, the Bank forecast inflation to return to the midpoint of its 3%-6% target band only by 2024’s fourth quarter. Inflation expectations have since improved locally and abroad.
The Bureau for Economic Research’s third-quarter inflation expectations survey published last week showed analysts, businesses and trade unions expect headline inflation to average 5.1% in 2024, down from 5.3% in the second-quarter survey.
Kevin Lings, chief economist at Stanlib, expected inflation to average 4.6% this year. While there remained some upside risks to SA inflation, Lings said, the moderation in food inflation to below the midpoint of the inflation target despite fears about the effect of El Niño on the summer grain crop harvest, and the recent outperformance of the rand were supportive of the Reserve Bank initiating a rate cutting cycle on Thursday.
“This is especially valid since the repo rate is well above inflation and firmly in restrictive territory, while SA’s economic performance remains subdued. SA’s sluggish economic performance together with the sustained high interest rates makes it difficult for companies to pass on any input price pressures,” he said.
These mitigating factors coupled with an improving outlook for global inflation (including within the US) and the start of rate-cutting cycles by other major central banks should allow the Reserve Bank to cut rates at least twice in the second half of 2024 and then continue to cut rates during the first half of 2025, Lings said.
SA economist at Citibank Gina Schoeman expected a unanimous decision by the monetary policy committee to cut rates by 25 bps though there was a likelihood that one or two members could vote for a 50 bps cut.
“We expect four 25 bps rate cuts between September 2024 and March 2025 with a risk that the Bank cuts more than a full 100 bps, and not less,” she said.
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