The South African Reserve Bank (SARB) will not give financially-constrained consumers the Christmas relief they were expecting with a deep cut in the interest rates today in spite of inflation plunging further below its 3-6% target range and to its lowest level in 4-and-a-half years.
Instead, economists yesterday said the SARB will likely overlook this slowing down of consumer prices and only cut rates by 25 basis points as the headline inflation base will start normalising next year on the back of the US President-elect Donald Trump implementing drastic import tariffs.
Data from Statistics South Africa (Stats SA) yesterday showed that the annual consumer price index (CPI) cooled for a fifth consecutive month and declined sharply from 3.8% year-on-year in September to 2.8% October, largely driven lower by declining fuel and food prices.
This inflation print is the lowest since June 2020 during the COVID-19 pandemic when the rate was 2.2%, and was deeper than expectations that it could be between 2.9 and 3%.
In September, the SARB announced the first interest rates cut in three years as it reduced the policy rate from a 14-year high by 25 basis points from 8.25% to 8% per annum, easing the prime lending rate from 11.75% to 11.50%, after headline eased to 4.4% in August.
Old Mutual Group chief economist Johann Els said the consumer goods inflation number suggested that there was no demand price pressures on inflation and everything was basically surprised to the downside over the past several months.
Els said this was an economy that was running at a very low inflationary pace, thus suggesting that the SARB should cut rates by 50 basis points.
“If they don't, I think they are making a serious policy error. I think they will not follow the US Federal Reserve’s example of saying we will wait until the new US administration’s policies have been implemented, then model the impact on the economy and inflation, and then react,” Els said.
“I think the Reserve Bank will highlight these incoming policies as risks. They will highlight rent risk and thus cut rates by only 25 basis points. In addition, I think the Reserve Bank might already be targeting inflation at 3%. That's morally wrong. They should be using the official target of 4.5% until such time as the target has been changed.
“[Headline] inflation at 2.8%, consumer goods inflation at 1.9%, core inflation at 3.9%, cut rates by 50 basis points or lose credibility. Again, they should cut by 50 basis points tomorrow. I don't think they will.”
Stats SA’s chief director of price statistics, Patrick Kelly, said falling fuel prices remained the primary factor behind the slowdown of inflation.
Petrol and diesel prices declined by 5.3% between September and October, taking the annual rate for fuel to -19.1%.
The price for inland 95-octane petrol in October was R21.05, the cheapest since February 2022 when the price was R20.14.
After remaining steady for six months in the 4.5–4.7% range, annual inflation for food and non-alcoholic beverages (NAB) also retreated to 3.6% in October, the lowest rate since November 2019 when the food inflation rate was 3.5%.
The core inflation rate, which excludes volatile items such as food, NAB, fuels, and energy, eased to 3.9% in October, the lowest since April 2022, down from 4.1% in each of the previous two months.
However, Dr Elna Moolman, Standard Bank Group head of South Africa macroeconomic, said this dip in inflation to below the SARB’s target range should be quite temporary.
Moolman said they were expecting a “gradual uptrend” in the inflation numbers from here, and as such the SARB was likely to look through this temporary decline in its interest rate decisions.
“The Reserve Bank typically focuses on inflation 12 to 18 months ahead when monetary policy can have an impact on the inflation prints,” Moolman said.
“We still think the Reserve Bank will gradually cut interest rates until it reaches a neutral level, in other words, until interest rates are no longer restrictive like they are now, but just having a neutral impact on the South African economy.”
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