THE cost of borrowing in South Africa is expected to remain elevated as the South African Reserve Bank (SARB) will not cut interest rates today, in spite of consumer prices dipping for the second month in a row in December 2023, but remaining at the upper limit of the target range.
Data from Statistics South Africa (StatsSA) yesterday showed that the headline consumer price index (CPI) eased to 5.1% in December from 5.5% in November and 5.9% in October.
This was the lowest reading in four months, edging closer to the SARB’s preferred 4.5% midpoint of the 3-6% target range.
The December CPI release concluded the results for 2023, showing the average inflation rate for the year was 6.0%, lower than 6.9% recorded in 2022.
StatsSA’s chief director for price statistics, Patrick Kelly, said prices decelerated mainly for food and non-alcoholic beverages, from 9.0% in November to 8.5% in December.
These included items such as bread and cereals, oils and fats, sugar, sweets and desserts, vegetables and hot beverages.
However, some items within the food and non-alcoholic beverages sub-categories registered a rise in inflation in December, including meat, milk, eggs and cheese, fish, fruit and “other” food.
Kelly said there were other notable price changes in December.
“Housing and utilities inflation reached 5.7%, the highest annual increase since May 2017, when the rate was also 5.7%,” Kelly said.
“The transport index increased by 2.6% in the 12 months to December 2023 – much lower than the annual rate of 13.9% recorded in December 2022.
“The slowdown is mainly a result of lower fuel prices that decreased by 2.5% over the previous 12 months, and by 2.7% between November and December.”
StatsSA said the annual core inflation, which excludes food, non-alcoholic beverages, fuel and energy prices, remained flat at 4.5% primarily supported by core goods, reflecting still-elevated global inflation and exchange rate pressures.
On a monthly basis, the CPI was unchanged in December after falling 0.1% in November.
Nedbank economist Johannes Khosa said they expected headline inflation to be relatively subdued in 2024, hovering between 5% and 5.5% in the first half of the year before falling more convincingly towards the midpoint of SARB's target range during the third quarter.
“We expect CPI to average 5% for the year. The downward pressure will mainly emanate from Brent crude oil prices, which will likely be subdued by weak global demand and translate into lower fuel prices.
“However, the risks to our forecasts reside marginally on the upside due to the fragile rand, the uncertainty in the global oil market, the elevated food prices, and high operating costs.”
The SARB’s Monetary Policy Committee (MPC) has been meeting this week and will announce its interest rates decision today.
Economists are expecting that the MPC will likely continue to have a hawkish tone and keep the repurchase rate (repo rate) unchanged at 8.25%, warning of inflation risks.
FNB senior economist Koketso Mano warned that some fuel price pressures were likely to build up from February.
Mano said government consumption, the ongoing geopolitical tensions and the continued impact on supply chains also stood to compound local logistical issues.
“These factors necessitate caution to be applied when predicting the disinflation trend in the near term. Over the medium term, we anticipate headline inflation falling more firmly towards target,” Mano said.
“That said, the MPC should not be too hasty to ease nominal interest rates, and real interest rates should remain higher than pre-pandemic levels for the foreseeable future in order to cater for higher funding costs.”
The Don Consultancy Group (DCG) chief economist Chifi Mhango concurred, saying keeping the repo rate unchanged would be the best way to manage the current underlying inflationary pressures in the economy.
“Despite the latest South African inflation rate abating, keeping the repo rate unchanged by the MPC will be the perfect stance considering the underlying inflationary pressures and a weak economic environment domestically,” Mhango said.
“Consumer spending in the South African economy is weak, with credit extension growth also slowing, mainly attributed to a restrictive monetary policy environment. Therefore, hiking the repo rate may also not be the right option in an already weak economy.”