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Mutterings about lower inflation target could scupper rate cut prospects

27 October 2024 Gareth Stokes

The news that headline inflation dropped to 3.8% year-on-year in September 2024 will offer some respite to South Africa’s long-suffering consumers, but not in the household budget categories that really count. Yes, average households will feel less of a ‘pinch’ when paying for goods and services; but regulated prices remain rampant, and debt servicing costs look set to stay higher for longer too. Why?

Redirection our inflation gains

The reason is that the South African Reserve Bank (SARB) is keen to leverage recent victories against inflation to achieve a narrowing of its inflation target. In a Bloomberg Television report, written up for Moneyweb.co.za, SARB governor, Lesetja Kganyago said that the country’s 3-6% inflation target was out of sync and due to be adjusted lower. “What is clear is that if we revise the target, the target can only be revised lower,” the governor said. 

Could Jane and Joe Average’s celebrations over forecasts of annual inflation remaining below 4% until mid-2025 be premature? Only time will tell. Until then, in its assessment of the September 2024 inflation print, Momentum Investments said inflation would average out at 4.7% in 2024, and ease further, to just 4.3% for full-year 2024. But the asset manager’s chief economist, Sanisha Packirisamy, warned against exuberance on the interest rate front. “While the monthly inflation rates suggest a stabilisation in consumer prices, we maintain our view that the SARB will proceed cautiously with interest rate cuts,” she said. The main reason for this cautious approach is that the country’s economy remains vulnerable to external pressures. 

Households struggling to service mortgage repayments can still look forward to a gradual decline in interest rates over the coming months. According to Packirisamy, the SARB will push ahead with three 25-basis point cuts starting in November 2024, eventually bringing the repo rate to 7.25% by end-2025. A three quarter percent easing in lending rates is not to be sneezed at; but it only frees up R512,01 per month on a R1 million bond. Last time your writer checked, that was hardly enough to take mom, dad and two kids for a lunchtime pizza. Phrased differently, this 0.75% cut is somewhat of a ‘slap in the face’ for consumers. 

Readers say it best

A great way to get to grips with consumer sentiment is to dive into the comments section accompanying economic reporting. There were few surprises among respondents to the aforementioned Moneyweb.co.za article. All agreed that the headline inflation numbers reported by Statistics South Africa did little to reflect the on-the-ground realities of household expenditure. One reader lamented that the “level of regulated prices in the domestic economy outstrip the SARB inflation target by multiples”. There is no better example than state-owned electricity producer, Eskom SOC Limited, which recently proposed a 36.1% hike in electricity tariffs for 2025. 

Eskom has been granted inflation plus increases for decades despite doing nothing to rein in its overheads, winning an 18% increase in 2023, and another 13% in 2024. And electricity prices inflate further when the municipalities get involved, decreeing their own round of increase for good measure. Medical aid contributions, another common household budget item, are soaring at around 3 times official CPI too. The irony, dear reader, is that the battle against inflation is being fought by the private rather than public sectors; and that where the private sector fails, they are usually pushing up against some or other regulatory constraint. 

Love or hate them, medical schemes have to comply with all manner capital and pricing rules set out in the Medical Schemes Act. They have to admit all comers to the scheme, must pay for the stipulated basket of prescribed minimum healthcare, and have to build up a reserve amount totalling 25% of members’ gross annual contributions, to name a few. Compliance shines through in the price of medical insurance, and these cost pressures translate directly into the overall inflation basket.

Medical schemes skewing inflation outlook

“Medical scheme increases are important for the inflation outlook given the hefty weight of medical insurance [which makes up] 7.11% of the CPI basket and 43.8% of administered prices,” Momentum wrote. They expect the proposed contribution increases for 2025 (sourced from BusinessDay) to exceed the estimated average inflation rate for that year, with quite a few double digit hikes. The average increases for next year are also predominantly higher than the increases implemented in 2024. “We can anticipate that medical health insurance inflation will rise in the February 2025 survey, placing upward pressure on headline inflation,” Packirisamy said. 

There are plenty of price drivers outside of government’s direct control, most notably the global oil price which filters through the domestic economy in higher fuel prices. The rand dollar exchange is important too, with any rand weakness against the US dollar leading to imported inflation domestically. According to Momentum, brent crude oil averaged US$76,4 per barrel in the first three weeks of October, slightly higher than the preceding month. “International oil prices were driven up by concerns over escalating tensions in the Middle East, but fears of a wider regional war have subsided, and the oil price has subsequently retreated,” the asset manager said. 

The last couple of months have been kind to motorists, with fuel inflation falling to negative 9% year-on-year in September thanks to recent diesel and petrol price cuts. “The transport category entered deflationary territory at 1.1% year-on-year in September, marking the fourth consecutive month of deceleration from 6.3% year-on-year in May,” explained Packirisamy. Fuel price cuts implemented in September and October will place further downward pressure on headline inflation in coming inflation ‘prints’. 

Agriculture subdued, for now

Food prices appear benign too, depending on where you shop. Paul Makube, Senior Agricultural Economist at FNB Commercial noted that food price inflation broke an 8-month long deceleration in September 2024, with prices 4.1% higher year-on-year. “Food inflation remains at its lowest level in fifty months if we exclude the July 2024 outcome,” he said. The economists expected prices to moderate across most agriculture commodities over the year ahead given the combination of an improved weather outlook, strong global supply and a stronger rand. 

For a fun take on food inflation, financial planner Johann Biermann has been keeping his LinkedIn followers up-to-date on inflation in the niche market for ‘braaibroodjies’, a type of toasted sandwich grilled over the coals. The index, which tracks prices of the key ingredients for the popular braai snack, was down 0.7% in September 2024. He reported that the big monthly price movers were onions, down 6.0%, and tomatoes, 2.3% higher. Over the year, cheddar cheese (+7.7%), tomatoes (+7.5%) and onions (+5.1%) have all overshot the official CPI inflation number, with the ‘braaibroodjie’ index up 5.3% year-to-date. 

The key message: You will enjoy your Heritage Day braai for a few more seasons; but you may have to move the affair to midday to avoid having to pay exorbitant electricity prices to light your entertainment areas. 

On a more serious note, the South Africa central bank seems hell bent on a cautious interest rate cutting cycle despite inflation moving deeper into its 3-6% target range. The SARB appears intent on rebasing its inflation target at closer to the 4% level, meaning it will be hesitant to make policy interventions that might see inflation push back to the current upper limit. 

The emerging market paradox

In a one-on-one interview with your writer, a respected economist recently suggested that the SARB governor’s long-term aim was to reduce domestic inflation to just 3%, in line with some of the country’s emerging market peers, and that this was a seemingly non-negotiable position. There are pros and cons to the approach. On the plus side, the country should benefit from lower inflation through currency stability, which would help with economic competitiveness. On the negative side, the cost of capital remains high, perhaps curtailing investment activity, and certainly putting strain on household budgets. 

All things being equal, the three 25 basis point cuts suggested earlier in this piece seem to be as good as it gets. “While the downward trend in inflation supports interest rate cuts, we do not think it warrants aggressive cuts,” concluded Packirisamy. “As the SARB has alluded to, in line with our long-standing view, the interest rate cutting cycle will be approached with caution.” 

Follow the writer on

LinkedIn: https://www.linkedin.com/in/gareth-stokes-media/

Twitter: @stokesmedia

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