CPI Slows to 5.2% but no SA Rate Cut Expected Before Late 2024
In a recent development that narrowly surpassed market forecasts, South Africa’s consumer price index (CPI) experienced a slight deceleration, landing at an annual 5.2% in April, down from 5.3% in March. A notable contributor to this easing was a drop in food prices, delivering somewhat of a relief to the ruling ANC party as the country approaches election time. However, despite this marginal dip, inflation continues to hover above the midpoint of the Reserve Bank’s 3% to 6% target range. Consequently, economic experts are aligning on the sentiment that a decrease in interest rates may not be on the horizon until possibly November.
The CPI’s reading at 5.2% was slightly more optimistic than the anticipated 5.3%, marking the second consecutive month of moderating consumer inflation. Particularly, April witnessed a deceleration in food inflation to 4.4% from March’s 4.9%, a development likely to alleviate financial pressure on households, especially those within lower income brackets.
This development comes as potentially positive news for the ANC leading into the forthcoming general elections. However, despite the easing in food prices, uncertainties around the trajectory of consumer food inflation in 2024 persist, with concerns highlighted regarding grain products due to a suboptimal white maize harvest expected to exert upward pressure on prices.
Egg prices, having caught significant media attention, saw a decline in inflation for the fifth consecutive month, although they remain high at a 25.1% increase.
While the CPI shows promising signs of deceleration, it remains within a range that the South African Reserve Bank (Sarb) views with discomfort. The bank has made clear its preference for steering consumer inflation towards the midpoint of its target range, if not to a more ambitious 3%. This stance mirrors that of more advanced economies, like the US, reinforcing the pressure on the Sarb to maintain a cautious policy stance.
Consequently, despite the favorable CPI outcome, analysts, including Razia Khan from Standard Chartered Bank, predict that policy rate adjustments are unlikely to occur before November. This sentiment is shared across the economic spectrum, with predictions centering on a stable monetary policy throughout most of the year, barring a potential minor rate cut towards year-end.
At present, South Africa’s key lending or repo rate stands at 8.25%, with consumers facing a prime lending rate of 11.75%. These rates have been maintained since May 2023 and are a critical focus of the Sarb’s monetary policy, influenced strongly by inflation dynamics and U.S. interest rate trends. The differentiation in interest rates between South Africa and the US plays a vital role in supporting the rand and in turn moderating imported inflation.
The prospect of U.S. interest rate adjustments before September remains unlikely, further consolidating the anticipation that the Sarb may refrain from rate alterations until at least November. However, with the South African rand showing resilience in the face of upcoming elections and attaining its strongest position in nearly 10 months, there could be potential for policy maneuvering if inflation firmly aligns with the Sarb’s target midpoint. This evolving economic landscape underscores the intricate balance the Sarb navigates in steering South Africa through uncertain inflationary terrains towards sustainable growth.
