The two-pot retirement reform’s impact on inflation

The SARB recently published an economic note outlining likely scenarios for the two-pot retirement system which is set to be implemented on 1 September 2024.

According to the note, the retirement reform is not expected to have an inflationary impact in 2024 under both the moderate withdrawal (deemed more likely) and the high withdrawal scenarios (see chart below). The reform is expected to have an inflationary impact (albeit small) in 2025 and 2026. According to the SARB’s core model, this would result in higher interest rates of 20 basis points in 2025 and 40 basis points in 2026 under the moderate withdrawal scenario and higher interest rate increases of 60 basis points in 2025 and 90 basis points in 2026 in the high withdrawal scenario.

The larger interest rate increases in the high withdrawal scenario are also influenced by the projected bigger knock on the currency (see chart). According to Citi, the reform may not lead to interest rate hikes, as the SARB note projects. This is because the expected improvement in the government debt ratio would result in a lower risk premium – a component not featured in the core model (model used in the economic note) but is part of the Quarterly Projection Model (QPM) which guides monetary policy decisions.

We caution that the actual inflationary impact will also depend on how consumers split the funds between debt reduction and consumption.

Our view on the interest rate
As reported by Statistics South Africa (Stats SA) on Thursday, the consumer price index (CPI or headline inflation) eased markedly from 5.1% year-on-year (y/y) in June to 4.6% in July, coming in markedly below consensus. The main contributors to the softer inflation rate were transport inflation, food and non-alcoholic beverages as well as alcoholic beverages and tobacco. Core inflation dropped to 4.3% in July from 4.5% June.

The inflation profile has improved relative to a few months ago, especially given the July dip below the 5% mark. Moving forward, it will be beneficial for consumers, and important for the SARB, that inflation remains sustainably closer to 4.5%. Against the favourable July CPI print and considering other factors we have detailed in previous notes, such as an improved inflation trajectory, moderating inflation expectations (next release due in September), a stronger rand against the United States (US) dollar and muted demand-pull inflation (proxied by contained rental inflation), we maintain our stance that the SARB will cut interest rates by 25 basis points in the September 2024 meeting to 8%. We think larger-sized interest rate cuts are less likely given that the SARB is not trying to signal a move to accommodative territory but rather indicating a gradual shift to neutral territory in real rates.

Our view of 100 basis points worth of cuts by the end of the first half of 2025 also remains intact, provided the inflation target range remains unchanged at 3% to 6% and barring any significant global developments that could derail this trajectory. Our projection of 100 basis points worth of cuts is slightly less than the 135 basis points priced in by the forward-rate agreement (FRA) market by the end of next year.