Sanisha Packirisamy, Economist at Momentum Investments

Momentum Investments have released their report based on “Food inflation dip drives headline figure lower to 5.3% in March” prepared by the Momentum Investments Macro Research Team.

Please see below, a summary of highlights from the team, as well as a PDF of the research paper attached.

Highlights

• According to Statistics South Africa (Stats SA), annual consumer price inflation eased to 5.3% year-on-year (y/y) in March 2024 from 5.6% y/y in February. The moderation in inflation was largely attributable to lower food and non-alcoholic beverages (NAB) inflation (5.1% y/y in March from 6.1% y/y in February).

• Housing costs (accounting for 16.5% of the inflation basket) remained contained and close to the lower limit of the inflation target range (3% to 6%). Limited housing cost pressures point to contained demand-pull inflation.

• Transport inflation surprised positively, easing by 0.1 percentage point to 5.3% y/y in March. The positive surprise was due to public transport disinflation offsetting the price pressure from fuel inflation. The implemented fuel price increases in April are expected to place upward pressure on transport inflation in the next month, albeit minimal. So far, data published by the Central Energy Fund (CEF) points to a small increase of R0.34/l in petrol (95 ULP) prices for May.

• According to Bloomberg data, the price of Brent crude oil breached the US$90/bbl mark in the first two weeks of April due to fears of escalating geopolitical tensions. According to The Guardian, the recent Iran attack on Israel did not affect the oil supply and is not expected to morph into a bigger war. Nevertheless, risks remain.

• Food inflation has moderated sharply from a peak of 14.4% y/y a year ago to 4.9% y/y in March 2024. The SA Reserve Bank (SARB) expects food inflation to moderate to 5.5% in 2024 from 10.7% in 2023. However, we note that the estimated food inflation for 2024 could have been lower in the absence of more intense El Niño conditions. The impact of El Niño is expected to filter through to consumer prices in the second half of this year.

• The proposed above-inflation electricity and water tariff increases by some of the municipalities present upward pressure on administered price inflation in the coming months.

• Given lingering inflation risks (geopolitical tensions, worse-than-expected weather conditions), we expect the SARB to err on the side of caution as the Monetary Policy Committee (MPC) debates the interest rate trajectory going forward.

• Anticipating the SARB to maintain interest rates at 8.25% in May and only cutting in the third quarter of 2024, we acknowledge increased risks to an even more delayed interest rate-cutting cycle due to global and local developments affecting inflation expectations and recent global central bank rhetoric, warning against the risks of a potential policy error associated with premature easing. While we continue to pencil in four interest rate cuts, in the cycle, of 25 basis points each between this year and next, there are still notable risks to a later and even shallower interest rate cutting cycle.

ENDS