The temporary drop in inflation is delaying interest rate cuts in South Africa
The lower price increases in South Africa in March are likely to be short-lived. Annual inflation, which fell to 5.3% from 5.6% in February, is expected to pick up in the second quarter, partly due to higher energy prices. Meanwhile, price increases are expected to continue through the end of the year, above the midpoint of the South African central bank’s 3-6 percent target, where it would like to see inflation anchored. This will likely delay rate cuts until 2025.
Modest increases in food prices are easing upward pressure on fuel prices. Food prices rose 0.1% in March compared to the previous month. Fuel price increases rose to 5.3% from 3% month-on-month, although a high base effect moderated the impact on the annual rate. Looking ahead, annual inflation will pick up in the second quarter and stagnate at around 5.5% by the end of 2024.
Strong inflation is expected to keep the SARB interest rate cut in check until 2025
The South Africa Reserve Bank will maintain its restrictive monetary policy stance well into 2025. The Fed’s restrictive policy change has not changed our interest rate outlook. It confirms our non-consensual view that interest rates will remain high for the longer term. Reducing the inflation rate – currently 5.6% – to the middle of the SARB target of 3% to 6% is taking longer than expected.
The central bank remained at 8.25% for the fifth consecutive month in March and adopted a more hawkish tone. Currently, headline inflation is closer to the upper band of the SARB target than to the mean. Governor Lesetja Kganyago expects inflation to reach the midpoint of 4.5% of the target by the end of 2025. Click the Text tab to view the full report.
Reforms and renewable energy are improving prospects for South Africa
South Africa’s prospects will improve slightly in the coming years. Growth is expected to rise to 1.0-1.5% from 0.7% in 2023, but remain below the long-term average of 2%. A more stable power supply, reforms in the logistics sector and lower interest rates will bring about the recovery. We expect there will be fewer years of disruptive power outages starting in 2025 as renewable energy comes online and ongoing maintenance of coal-fired power plants begins to bear fruit.
A realignment of leadership at state-owned logistics company Transnet will help ease bottlenecks. On the supply side, activity is expected to pick up the most in manufacturing and mining, as they are energy and logistics intensive. On the demand side, consumption will pick up as lower interest rates ease credit conditions and real incomes improve.
