In a Reuters survey, 23 economists unanimously predict that the South African Reserve Bank (SARB) will maintain the repo rate at 8.25% during its Monetary Policy Committee (MPC) meeting on Wednesday, March 27th.
The survey also revealed that a small majority anticipated the repo rate to remain unchanged in May compared to a 25-basis point decrease. Seven out of 17 participants projected a reduction of 50 basis points by the conclusion of the MPC meetings in July and September, while five anticipated a decrease of 75 basis points. Four respondents suggested a trim of 25 basis points, and one expected no change.
Momentum Investments reports that the average inflation projection for this year among analysts, businesses, and trade unions stands at 5.4%.
In February, headline inflation rose from 5.3% year on year to 5.6%, edging closer to the upper threshold of the South African Reserve Bank’s target range of 3% to 6%.
This was the second consecutive increase in the Consumer Price Index (CPI), which hits its highest level in four months.
The culprits were fuel and medical insurance costs.
In February, medical insurance, constituting 7.1% of headline inflation and 13.9% of the core basket, increased to 12.9% year on year from 6.9% year on year in January. This surge was driven by significant rises in membership contributions from medical schemes.
Premiums for all types of insurance have increased by 9.5% over the past year.
Core inflation excludes the more volatile price categories of food, fuel, and electricity.
Core inflation surged from 4.6% year on year in January to 5% year on year in February, reaching its highest level since June 2023. Similar to headline inflation, this marked the second consecutive rise. Month on month, core inflation increased by 1.2%, primarily due to elevated medical insurance inflation.
In February, the inflation rate for goods slowed down to 6.2% year on year from 6.6% year on year in January.
In February, the rate of inflation for services increased from 4% year on year in January to 4.9%, surpassing the 4.5% threshold after six consecutive months of remaining below the midpoint of the inflation target.
‘Delayed and shallower interest rate cutting cycle’
Momentum Investments’ macroeconomic research team suggests that recent global and local events indicate a postponed and less pronounced cycle of interest rate reductions.
One of the major threats to the inflation trend stems from the El Niño weather phenomenon. The drier climate poses a significant risk, particularly concerning the outlook for food inflation.
Furthermore, the fluctuation in inflation results, combined with the fact that headline inflation is nearing the upper threshold of the inflation target range, might raise apprehensions for the SARB. The central bank has indicated the necessity of observing a clear trend indicating a decrease in inflation towards the midpoint of the inflation target.
Another aspect is the heightened inflation anticipations. The possibility of maintaining interest rates at elevated levels for a longer duration than anticipated might serve as a tactic to convey the SARB’s dedication to curbing inflation and steering it back towards the 4.5% threshold.
Lastly, significant central banks worldwide are indicating a postponed and less pronounced cycle of interest rate reductions. This aspect holds significance when viewed from the perspective of interest rate differentials.
Momentum has updated its earlier prediction regarding the initiation of the rate reduction cycle by the SARB. Previously anticipated to commence in the second quarter of 2024, it is now projected that interest rate reductions are more probable to commence in the third quarter of the year.