A view on today’s inflation release and the impact on the next interest rate decision

Headline and core measures of inflation continued to subside further in South Africa. According to Statistics SA (Stats SA), headline inflation (CPI) dropped from 5.5% in November to 5.1% in December 2023, showcasing a reasonable drop in food inflation, which decelerated from 9% in year-on-year (y/y) terms in November to 8.5% y/y in December and remained flat in the month.

Weather conditions have been more favourable than initially anticipated. Nevertheless, SA’s citrus exports are down significantly given logistics challenges at SA’s harbours. With citrus exports ranking as the number one agricultural export, ahead of maize, logistical bottlenecks continue to hinder progress in the agricultural industry. Weather conditions as we shift into February still pose a risk, for white maize in particular, but SA is likely to remain a net exporter of maize, which will keep a lid on maize prices. Loadshedding risks nevertheless continue to pose upward pressure on vegetable and chicken prices given their reliance on irrigation and refrigeration, respectively.

“Today’s headline measure of inflation was marginally lower than the Bloomberg median consensus expectation of 5.2%”, says Sanisha Packirisamy, economist at Momentum Investments. “The continuation in SA’s disinflation trend was also partly driven by a noteworthy 65 cents per litre drop in fuel prices in early December, which dragged petrol inflation lower to negative 2.5% y/y. January recorded another sizeable petrol price cut of 72 cents per litre (Gauteng 95), which will exert further downward pressure on the January inflation figures and could help to offset the effects of low base effects starting to creep in. Gauging daily data from the Central Energy Fund, February is currently on course for a 44 cents per litre increase in the petrol price.”

“Although Brent crude oil prices have not reacted severely to the rise in conflict in the Red Sea, geopolitical risk factors, including the ongoing standoff between Russia and Ukraine and the Israel-Palestine conflict, continue to pose a significant upside threat to the international price of oil”, said Packirisamy.

“Today’s figures leave our annual expected average on headline inflation at 5.4% for this year and 4.5% for next year”, highlights Packirisamy. “December’s inflation figure should corroborate the view of continued disinflation, locally, into the remainder of 2024. As such we continue to project no further interest rate hikes in the current cycle. Although financial markets have brought forward the timing and extent of expected interest rate cuts in developed market economies, the Reserve Bank is expected to continue flagging persistent risks to the inflation trajectory posed by administered prices, currency weakness and geopolitically-driven international oil and food prices. We are pencilling in the first interest rate cut of 25 basis points in May 2024, at the earliest and are forecasting three cuts in total for the year, leaving interest rates at 7.5% by the end of this year.”