Sanisha Packirisamy, Economist at Momentum Investments
Statistics South Africa (Stats SA) reported headline inflation (CPI) at 5.4% year-on-year (y/y) for September 2023, notably higher than the 4.8% y/y figure in August 2023.
“Relative to the Reuters’ median expectation, today’s headline measure of inflation surprised marginally negatively to the upside by 0.1%,” says Sanisha Packirisamy, economist at Momentum Investments. “Markets were nevertheless anticipating a jump in headline inflation, reflecting the reversal in base effects in fuel prices. Underlying measures of inflation, nonetheless, surprised to the downside. While the Reuters’ consensus was looking for core inflation of 4.7% in September, the figure came out slightly lower at 4.5%, suggesting that underlying measures of demand in the economy remain relatively weak, suggestive of fewer signs of broader-based inflationary pressures. Subdued demand was also evident in the small increase in rental inflation of 0.8% relative to the previous month, resulting in a lower-than-average year-on-year increase of 2.6%,” she added.
Packirisamy notes that “the fuel price played a significant role in the inflation figure published today given the R1.71/litre rise in the petrol price in September, which added substantially to the upwards pressure in the inflation outcome. Petrol inflation rose from negative 11.7% y/y in August to 1.5% y/y in September. With October also recording a large petrol price hike (R1.14/litre), transport inflation is expected to play a prominent role again in October’s inflation print. However, based on the current over-recovery, we are on course to experience a notable cut in the petrol price of around R2/litre in November, which could see some inflationary relief coming through later in the year,” says Packirisamy.
“Theses figures leave our annual expected average on headline inflation at 5.8% for this year and 4.7% for next year,” highlights Packirisamy.
According to the South African Reserve Bank (SARB), local policy rates have been accommodative for the majority of the normalisation period and only turned restrictive with the 50-basis point hike implemented in May 2023. Since then, policy rates have remained tight. The SARB is expected to maintain a restrictive environment well into 2025. This is in line with the global narrative of keeping interest rates sufficiently high for sufficiently long to ensure that inflation and inflation expectations are well anchored. Central banks, globally, remain cautious to prematurely declare a victory on inflation and as such are likely to avoid early easing in light of continued upside risks to inflation, including the recent Israeli-Gaza conflict, which adds to international oil price pressures.
“We suspect that the SARB is likely either at the end of the current hiking cycle or very close to the end, but interest rates are nevertheless expected to stay high for longer to counter fiscal dominance and lingering upside threats to inflation. We see the SARB cutting rates only by the middle of 2024,” concludes Packirisamy.
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