ECONOMISTS remain hopeful that the Government of National Unity (GNU) will ease the South African Reserve Bank’s (SARB’s) concerns over delivering the first interest rates cut in three years before the end of the year in spite of consumer inflation remaining unchanged in May.
What gave economists confidence was that the markets have responded positively to the formation of the GNU as the JSE All Share Index surged by more than 2% yesterday to around 81 100 points, hitting an all-time high buoyed by resource-linked sectors, financials, and industrial stocks, while the rand also dipped below the R18 mark to the dollar, hitting R17.96 for the first time in more than 10 months.
Data from Statistics SA yesterday showed that the annual headline consumer price inflation stood at a four-months low of 5.2% in May, and in line with market forecasts.
On a monthly basis, consumer prices rose by 0.2% in May following a 0.3% increase in April.
Stats SA’s director of price statistics, Patrick Kelly, said annual rates for four of the 12 product groups remained steady between April and May, including food and non-alcoholic beverages (NAB).
Kelly said higher rates were recorded for transport, alcoholic beverages and tobacco, and recreation and culture though inflation was softer for miscellaneous goods and services, communication, clothing and footwear, health and restaurants and hotels.
“After five consecutive months of decline, food and NAB inflation remained steady at 4.7% in May, unchanged from April. Bread and cereals continued to trend downward, slowing further to 3.9%. This is the lowest annual reading for bread and cereals since February 2022 when the rate was 3.7%,” Kelly said.
“Transport quickened to 6.3% from 5.7% in April. This is the highest rate for the category since October 2023 when it was at 7.4%. Fuel was the major culprit, with petrol and diesel prices increasing on average by 9.3% over the last 12 months, and by 0.6% since April.”
However, fuel prices have already declined markedly in June with a R1.24/litre decrease in the petrol price while diesel prices fell by R1.09-R1.19/litre, and this is expected to exert moderating pressure on June’s inflation outcome.
A further steep drop of about R1/litre is expected in July on lower international oil prices.
Anchor Capital investment analyst Casey Sprake said they expected inflation to remain subdued, albeit at levels higher than initially envisioned at the start of this year.
As a result, Sprake said, interest rates would likely remain on hold when the SARB’s Monetary Policy Committee convened on July 18.
“However, we foresee potential rate cuts materialising towards the end of 2024, depending on the inflation outlook (locally and abroad) and global interest rate developments as we progress further into this year,” she said.
“At this stage, we expect an initial reduction of 25 bps in November, followed by a further 50- to 75-bp cut in 2025. The subdued demand in the local economy continues to exert downward pressure on core inflation.”
The SARB officials have consistently noted the emphasis they are putting on headline inflation, as well as inflation expectations, reaching the midpoint of the inflation target of 3-6% before any decision to loosen policy.
The bank has left the repurchase rate (repo rate) at 14-year high of 8.25% for the past six consecutive meetings as inflation has remained stubbornly toward the upper limit of the target range.
David Omojomolo, Africa economist at Capital Economics, said the formation of a GNU would ease the SARB’s fiscal concerns and could bring rate cuts onto the table before year-end.
President Cyril Ramaphosa was sworn in for a second term yesterday and said the formation of the GNU was a moment of profound significance and required a common mission, anchored in safeguarding national unity, peace, stability, inclusive economic growth, non-racialism and non-sexism.
Omojomolo said:.“From here on we expect inflation to stay around its current level, leaving the SARB unlikely to start its easing cycle. That said, the GNU is likely to have soothed fears at the SARB about the fiscal picture, a key component of their reaction function.
“For now, we are sticking with our call of interest rate cuts only starting in 2025, but there is a growing chance of some easing before the end of this year.”
BUSINESS REPORT