South Africa: Inflation idiosyncrasies set to fade

Jeff Schultz, Senior Economist at BNP Paribas South Africa

KEY TAKEOUTS:

• We think softer unit labour costs that allowed South Africa’s inflation to buck the rising trend in emerging markets in 2021 have bottomed, supporting a steady rise in core inflation over the medium term.
• The upside risks to inflation and, larger, earlier rate hikes from key developed market central banks lead us to add another 25bp rate hike in November 2022. We now expect a terminal policy rate of 6.00% to be reached by Q2 2023.
• Post-pandemic productivity gains will need to be maintained for underlying inflation to remain behaved. This is fundamental to the South African Reserve Bank’s ability to stick to its “gradual” normalisation plans, we think.

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