The South African Reserve Bank (SARB) is expected to shrug off the moderation in consumer prices and continue with its rate cutting cycle next year as the headline inflation remains below the lower end of its 3-6% target range.
The SARB last month announced a second consecutive 25 basis points cut to interest rates, taking the repurchase rate from 8% to 7.75% and the prime lending rate will also drop from 11.5% to 11.25% per annum, after headline consumer inflation fell to 2.8% in October.
Data from Statistics South Africa (Stats SA) yesterday revealed that the annual inflation rate rose to 2.9% in November, slightly up from a four-year low of 2.8% in October, driven high by rising fuel prices.
Though this marked the first increase in consumer inflation after five consecutive periods of easing, it was the second consecutive month of inflation registering below the lower limit of the inflation target range and signals subdued inflationary pressures.
Stats SA said annual inflation for food and non-alcoholic beverages fell to its lowest in 14 years, slowing to 2.3% in November from 3.6% in October.
The sharp decline in food prices managed to offset the 0.9% month-on-month increase in fuel prices in November.
Momentum Investments chief economist, Sanisha Packirisamy, said the slight acceleration in the inflation rate in November indicated that inflationary pressures remained subdued.
“As such, our inflation and interest rate estimates are unchanged at an annual inflation rate projection of 4.5% in 2024 (we had revised this further down following the inflation dip in October’s print) and a moderation to 4.2% in 2025,” she said.
“Furthermore, we are still pencilling in two more 25-basis point interest cuts in 2025, taking the repo rate to 7.25%. This would be the lowest repo rate since February 2023.”
Stats SA said core inflation also had no monthly pressure and softened to 3.7% year-on-year from 3.9% previously.
Services inflation eased to 4.3%, from 4.4% previously, while core goods inflation slowed to 2.7%, from 3.0% in October.
“We see inflation remaining around 3.0% in December, with monthly pressure driven by higher fuel prices and, potentially, core inflation with a new survey outcome on housing costs. Food inflation could remain subdued,” said FNB senior economist, Koketso Mano.
“We expect headline inflation to continue rising steadily into 2025, but we do not expect it to surpass 4.0% until the turn of the year. Risks to the outlook include a more robust normalisation in services inflation, starting with medical insurance in February and followed by other services that would be supported by improving domestic demand.”
Economists, though, also warned that growing trade restrictions and geopolitical tensions would also drive reflationary pressure across various parts of the globe and keep monetary policy tighter than currently anticipated.
Nedbank economist Johannes (Matimba) Khosa said global oil prices will likely rise slightly as global demand improves and OPEC extends production cuts.
Khosa said the ongoing conflicts in the Middle East also still threaten oil prices while the stronger US dollar will likely weigh on the rand and other emerging market currencies.
“The dollar will benefit from the expected change in US economic policies under Donald Trump's administration, which could lead to sticky global inflation and raise the floor on interest rate cuts,” he said.
“On the domestic front, the threat of electricity tariffs and other administered prices rising more than expected and wages outpacing productivity could also exert pressure. Despite these risks, inflation is expected to hover around the SARB’s 4.5% target for much of next year and average 4% in 2025.
“The economic recovery is also unlikely to lead to significant demand pressure on prices. Consequently, we expect the SARB to cut interest rates by 75 basis points in 2025.”
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