South Africa's inflation fell to the lowest in 16 years on a sharp decline in consumer demand, thwarting any hopes that the SA Reserve Bank might review its monetary policy stance. Photo: IOL
South Africa's inflation fell to the lowest in 16 years on a sharp decline in consumer demand, thwarting any hopes that the SA Reserve Bank might review its monetary policy stance. Photo: IOL

Inflation rate tumbles to a 16-year low

By Siphelele Dludla Time of article published Jan 21, 2021

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JOHANNESBURG - SOUTH Africa's inflation fell to the lowest in 16 years on a sharp decline in consumer demand, thwarting any hopes that the SA Reserve Bank (SARB) might review its monetary policy stance.

Data from Statistics SA (StatsSA) yesterday showed that the country's annual inflation rate slowed to 3.1 percent in December from 3.2percent in November, edging even firmer to the lower band of the SARB's target range of 3-6 percent.

This was the lowest inflation rate since September amid a slowdown in cost of housing and utilities, and a decrease in prices of transport, restaurant and hotels.

StatsSA said that food inflation, however, rose to over a 3-year high at 6.2 percent from 5.9 in November, pushed up by rising prices of meat, fruit, oils and fats. But core consumer price inflation (CPI) inflation remained steady at 3.3 percent in December with both goods and services inflation rates unchanged at 2.6 and 3.7 percent respectively.

On a monthly basis, StatsSA said consumer prices increased 0.2percent after being flat in November and matching market consensus.

StatsSA said the 2020 inflation was the lowest annual average rate since 2004, which was 1.4 percent and the second lowest since 1969 which was 3 percent.

The loss of momentum in the economy late last year and a likely further slowdown early in 2021 suggested that another interest rate cut was likely to be under consideration.

However, economists quickly warned that rising oil and food prices could weaken the inflation outlook in the medium term, forcing the central bank to take a conservative stance on rates.

FNB chief economist Mamello Matikinca-Ngwenya said there were concerns about the persistent rise in food prices over the short term, and that marginal increases in rentals were possible.

Matikinca-Ngwenya said the rise in the oil price was a key risk to the inflation outlook. “We maintain that SARB has room to ease further in the first half of 2021,” she said.

“However, should the risks highlighted above materialise, the bank will likely keep rates unchanged this year.”

The implementation of Covid-19 lockdown restrictions since the end of March 2020 affected both producer and consumer demand throughout the year. In November, the SARB left the repurchase rate (repo rate) unchanged at 3.5 percent in a split decision following five consecutive cuts to help mitigate the impact of the Covid-19 pandemic.

The bank's headline consumer price inflation forecast averages 3.9 percent in 2021 and remains at 4.4 percent in 2022. SARB said its quarterly projection model showed the next move in interest rates was likely late in the year.

Sanlam Investments chief economist Arthur Kamp concurred that inflation was expected to lift in 2021 as oil and food commodity prices have been increasing.

Kamp said South Africa's failed fiscal policy held risk for the rand, inflation expectations and ultimately the inflation outlook.

BUSINESS REPORT

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