Consumer prices in South Africa are likely to remain elevated above the central bank’s target range for the remainder of the year, triggering a continuous rise in interest rates in spite of inflation softening for the first time since January.
This comes as the annual consumer inflation edged lower to 7.6% in August from 7.8% in July due to declining fuel prices as the global oil prices eased.
In August, the price of petrol declined by R1.32c and diesel by 88 cents per litre, respectively, in spite of the reintroduction of the temporary reduction in the general fuel levy of 75 cents per litre.
Statistics South Africa (Stats SA) yesterday said fuel prices decreased by 3.8% between July and August, with petrol falling by 5% and diesel by 0.9%, pushing the annual rate for fuel down to 43.2% from 56.2% in July.
However, Stats SA chief director for price statistics Patrick Kelly said food inflation remained elevated.
“In contrast to fuel, food inflation continued upwards. Annual food and non-alcoholic beverages inflation has climbed significantly from the recent low of 6% in April this year and has remained above 5% since October 2020,” Kelly said.
On a monthly basis, the CPI inched up by 0.2%, the lowest reading since January 2022 when it was also 0.2% while the core inflation dropped to 4.4% from 4.6% year-on-year.
Nedbank’s economist Johannes Khosa said that headline inflation was likely to ease further in the months ahead, ending the year at around 6.9%.
Khosa said the downward force would come from falling international oil prices, with Brent crude oil price down just more than 33% from its peak in early March, as global growth slows.
“However, other factors are expected to slow the rate of moderation in headline inflation, keeping price pressures elevated through to the end of 2023. Chief among the upside risks is a vulnerable rand, or perhaps more accurately, an exceptionally robust US dollar,” Khosa said.
“Apart from a weaker rand, higher domestic wage settlements ranging between 6% to 7% and Eskom’s request for a tariff increase of just over 32% also pose significant upside risks to the inflation outlook.”
Though the consumer price index (CPI) has moderated as inflation likely peaked in July, the August inflation print remains above the upper limit of the SA Reserve Bank (SARB) target range of 3%-6% per annum.
As such, economists are pricing in a 50-75 basis points interest rate hike by the SARB today to tamper down on demand and hopefully ease the rate of inflation.
The 0.5 percentage points increase in the repurchase rate (repo rate) will take the SARB’s interest rates from 5.5% to 6% per annum and the prime lending rate from 9% to 9.5% per annum, after the central bank delivered a shocking 75 basis points increase last month, the biggest in more than six years.
Both the SARB and the US Federal Open Markets Committee (FOMC) are seeking to get their targeted measures of inflation back to 4.5% and 2.0% year-on-year, respectively.
Momentum Investments economist Sanisha Packirisamy said they continued to forecast a 75-basis point increase in interest rates to be followed by a 50-basis point rise in November, despite headline inflation showing tentative signs of easing.
“The SARB is likely to maintain a hawkish tone in the near term as it responds to peaking local inflation, lingering upside risks to the inflation trajectory, a rapid pace of interest rates normalisation globally, and a marked deterioration in longer-dated inflation expectations,” Packirisamy said.
“Additional interest rates hike will be dependent on whether inflation has indeed peaked in the third quarter of the year as current market forecasts suggest.”
BUSINESS REPORT