The inflation rate is moderating, but interest rates will still increase as inflation still lies above the 6% target band of the Reserve Bank, which is expected to hike rates again next week by another 50 or even 75 basis points.
Although consumer price inflation eased for the second month in a row to register 7.2% in December, annual inflation averaged 6.9% in 2022 from an average of 4.5% in 2021, the highest level since 2009 when it was 7.1%, but still notably lower than the 11.5% recorded in 2008.
Economic research group Oxford Economics Africa says the annual increase was in line with its forecast.
“Although price inflation is moderating, prices are likely to remain sticky and the risk to the inflation outlook is positive, but the latest drop in headline inflation will not deter the South African Reserve Bank (Sarb) from tightening policy further next week, nor does it alter our view of an additional 50 basis points repo rate increase.”
The National Energy Regulator of South Africa’s (Nersa) shock tariff announcement is likely to have inflationary implications down the line, the group says.
“Consequently, we have revised our inflation forecast for 2023 up to 6.2% from 6.0%. Inflation will also likely average at a slightly higher rate in 2024.”
Expectations of future inflation increased recently and remain at elevated levels.
“Inflation expectations in surveys conducted in the fourth quarter of 2022 showed headline inflation increasing to 6.1% in 2023, compared to the 5.9% pencilled in during the third quarter,” the group says.
“Price inflation is now seen averaging 5.6% in 2024 versus the 5.3% expected previously. Monetary authorities will likely take this as a sign that further action is required as they attempt to drive down inflation.”
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Sarb committed to stabilising inflation
The group says the Sarb made it clear that it remains committed to stabilising inflation expectations more firmly around the midpoint of the inflation target band at 4.5%. The latest inflation expectations do not capture Nersa’s newly announced electricity tariffs.
“Inflation is projected at 6.2% this year. Slow disinflation dynamics imply that the Monetary Policy Committee (MPC) of the Sarb will consider lifting interest rates by another 50 basis points in the first quarter before pausing.”
The group says it does concede the risk of a terminal rate higher than 7.5% as international oil prices are on the rise once again.
Adriaan Pask, CIO at PSG Wealth, says while it is encouraging to see a decline in CPI, higher inflation expectations and depreciating currencies continue to reinforce the pressing need for central banks to accelerate the normalisation of their policy rates, tightening global financial conditions.
“On balance, capital flow and market volatility are expected to remain elevated for emerging market assets and currencies while the implied policy rate path of the SARB’s quarterly projection model indicates gradual normalisation through to 2024.”
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Inflation expected to ease further?
Koketso Mano, senior economist at FNB, says with just an update of today’s data, the bank predicts headline inflation will ease further to 6.7% in January.
“Headline inflation should moderate to within the inflation target range, at just over 5.0%, in 2023. This is with fuel as well as food and NAB inflation decelerating this year, while core inflation continues to normalise and electricity inflation edges higher following Nersa’s approval of the Eskom price increase.”
Mano adds that global inflation is falling but expectations remain elevated relative to pre-pandemic levels.
“The cumulative rise in interest rates is expected to dampen activity, resulting in a global economic slowdown and together with easing supply chain pressures, should support softer inflation.”
Advanced economy central banks continued hiking interest rates in December, with the Fed and ECB FNB also expects the pace of interest hikes to slow to 50 basis points.
“With inflation potentially falling closer to target in the second half of 2023, the MPC would have created sufficient policy space to support the economy towards year-end,” Mano says.
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Sarb could trim size of interest rate increase
Miyelani Maluleke, senior economist at Absa Corporate and Investment Banking, says food inflation fell slightly for the first time in eight months, but not as much as Absa expected.
“Headline inflation should continue to ease in the coming months, mainly driven by base effects on fuel and further moderation in food inflation, in our view.”
Ahead of next week’s MPC meeting, Maluleke says Absa sees today’s data and specifically the downside surprise in core as supportive of its view that the MPC will trim the size of tightening to 25 basis points on 26 January, although the vote splits in recent MPC meetings shows that considerable uncertainty remains around the rate decision.
“The slowdown in headline CPI inflation was partly driven by fuel, where base effects continued to push the year-on-year inflation rate lower despite the 1.7% month-on-month increase in prices. What we and the consensus did not anticipate was the slowdown in core CPI inflation that eased by 0.1 percentage points in December against our and the TR consensus of a 0.1 percentage points increase to 5.1%.”