Inflation has eased to 2.7%, but geopolitical risks are likely to weigh heavily on upcoming repo rate discussions.
Image: Henk Kruger / Independent Newspapers
Even though the rate of increase in the cost of living declined by 0.5 percentage points year-on-year in March – beating expectations – the Reserve Bank will remain cautious about cutting interest rates next month due to current geopolitical tensions.
Yet, the central bank may see room to start cutting rates marginally from around the middle of the year, according to Old Mutual’s chief economist, Johann Els.
Els said that the Consumer Price Index (CPI) surprised on the downside, coming in at 2.7% in March instead of his anticipated 3%. The February figure was 3.2%. “So, significantly lower than expected by me, anybody out there in the market, and by the Reserve Bank,” he said.
Elna Moolman, Standard Bank Group Head of South Africa Macroeconomic Research, said that inflationary pressure remains quite benign, vindicating the Reserve Bank’s decision to cut rates last year. However, she said it doesn’t remove all the Bank’s concerns about medium-term upside pressure on inflation given global tariff concerns.
Despite the welcome number, Els believes that the South African Reserve Bank will be cautious at the next Monetary Policy Meeting (MPC) on May 8, when they consider interest rate cuts. This, he explained, is given all the global uncertainty created by Trump’s tariff positioning now.
“I think the Reserve Bank will welcome these lower numbers, but they will keep rates unchanged at their next MPC meeting, given all the global uncertainty at the moment,” Els said.
However, Els does see room for the Reserve Bank to cut rates around July again. “For the moment, I think there's going to be one more 25 basis point rate cut, but there might be room for two 25 basis point rate cuts, given the low trajectory of inflation over the next few months.”
Els explained that “the lower-than-expected March number means that, during the second quarter, the April, May, and June numbers could be around 2.5%. Lower than what I previously expected, and definitely lower than the Reserve Bank's latest forecast,”
Lower inflation was seen across almost all categories and, while food inflation crept up a bit, it was well contained at 2.2%, said Els. Food inflation, especially in maize, was a notable driver of February's inflation figure.
Els also noted that, given the fact that alcoholic beverage prices increased at a slower rate than expected, the sin tax increase in the latest budget didn’t seriously affect that number. He added that clothing, shoes, fur, appliances and vehicle inflation were all well contained. “So, there’s no consumer price pressures out there,” said Els.
Els added that there was a downside surprise in terms of education costs, which comes as there is also continued low communication and health inflation.
Moolman said the lower inflation number, which surprised on the downside, was partly due to food, as well as rental inflation. Rental inflation is only surveyed quarterly, and this is the second quarter in a row that it declined. This, she said, is “clearly reflective” of a weakness in the residential rental market.
Lara Hodes, Investec economist, noted that there was no impact on inflation in terms of fuel prices, given that the cost of a litre of petrol only dropped 7c in March. She added that “a more substantial petrol price decrease was implemented in April which will contribute to reducing inflationary pressure during that month”.
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