By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
A lower inflation target for SA
A day after the national elections, the Monetary Policy Committee (MPC) will be announcing their decision on interest rates. Much like the previous meeting, we expect no major forecast changes and for interest rates to remain unchanged. This aligns with most analyst expectations, and interest rate cuts are only anticipated from 2H24. However, there is less agreement on the projected cutting cycle as there are several moving parts to consider: a conservative approach by the Fed, upside inflation risk, and the pursuit of a lower inflation target for South Africa (SA), as discussed last week.
Minutes from the latest Fed meeting highlight the committee's dedication to guiding inflation down to the 2% target, even if it requires further interest rate hikes. However, with the latest data indicating a cooling labour market and inflation, market expectations have barely moved and at least one 25bps cut is anticipated before the end of the year. Most analysts expect the cutting cycle to start in September, versus previous expectations for June or July. By then, a cut by the European Central Bank (ECB) should have been delivered. From a real interest rate differential perspective, there would be space for cuts in SA, all else being equal. Mitigating some of this space is Japan's efforts to move interest rates further away from zero, but this may be reliant on how the economy performs following a disappointing 1Q24 preliminary reading.
Another potential detractor from this space is inflation. While upside inflation risk is a global theme, given prevailing geopolitical tensions and adverse weather patterns, SA's vulnerability is amplified by a volatile exchange rate and domestic supply constraints. In line with this, the South African Reserve Bank's (SARB's) latest predictions, like the Reuters analyst consensus, are for inflation to only stabilise at 4.5% from the end of 2025. This is against expectations that inflation in the Euro area, for example, will stabilise at target by year-end.
On its downtrend, SA's inflation will likely face bumps along the way. The first of which should be the anticipated strengthening in food inflation at the turn of the year, as the impact of earlier hostile weather conditions shows up in retail prices. However, improved crop estimates, sufficient supplies for domestic demand, and a less depreciated rand, could support less passthrough than initially feared. Nevertheless, the latest indications of import price pressures suggest an acceleration in food prices. This emphasizes the impact of adverse weather in other countries, which has driven several soft commodity prices higher. Second to highlight is the risk posed by heightened tensions in the Middle East. These have already affected logistics but could easily spill-over to oil supply and drive fuel costs higher. Contained conflict would have limited impact on prices as Saudi Arabia's spare capacity would allow the Kingdom to intervene to avoid market share loss. However, a wider conflict could be harder to manage. In line with this, the MPC is likely to keep highlighting upside risk to inflation.
The consensus expectation is for the first cut to be delivered in 3Q24, with a cumulative 50bps worth of cuts by year-end. We anticipate a 25bps cut in November, while some analysts see the possibility of no cuts this year. By the end of 2026, most analysts foresee a 7% repo rate, but we, along with a few others, currently predict 7.5%. A stickier interest rate path provisions for a change in the SARB's reaction function, as they pursue a lower inflation target. Ultimately, it remains in line with the "higher-for-longer" theme.
Week in review
The leading business cycle indicator measured 110.4 points in March, reflecting a 1.9% m/m decline. This decrease was due to declines in five out of seven constituent variables, with the largest negative contributions from the number of building plans approved and the trend growth in the number of new passenger cars sold. The indicator was down 1.3% y/y, marking the twenty-fourth consecutive month of annual decline. This trend is consistent with the weakness and incomplete recovery in the goodsproducing sectors.
Headline inflation softened to 5.2% in April from 5.3% in March, with monthly pressure of 0.3%. Driving the monthly pressure was core and fuel inflation. Core inflation lifted by 0.2% m/m and 4.6% y/y, primarily driven by alcoholic beverages and tobacco. Fuel increased by 1.9% m/m and 9.0% y/y, while food and NAB inflation continued to slow, settling at 4.7% y/y from 5.1% previously. We expect monthly pressure on headline inflation to ease further in May and annual inflation to remain unchanged. Beyond May, core inflation should stabilise, fuel price dynamics should be more positive, but food inflation should reflect some upward pressure from adverse weather conditions. Average annual headline inflation should be north of 5% for 2024.
Week ahead
On Thursday, private sector credit extension (PSCE) for April will be released. In March, PSCE quickened to 5.2% y/y, from 3.3% in February, supported by increased demand in the corporate sector. In the household sector, credit uptake slowed from 4.1% to 3.7% - the lowest growth rate since March 2021, reflective of tight credit conditions. Nevertheless, demand for consumption credit facilities remained robust as consumers struggle to make ends meet. Overall, inflation-adjusted annual PSCE growth has been negative since August 2023, indicating tighter credit conditions and supporting the expectation of interest rate reductions in 2H24.
On Thursday, producer inflation data for April will be released. In March, producer inflation increased slightly to 4.6% y/y from 4.5% y/y in February. Monthly pressure was notable at 1.1% m/m, driven by significant increases in petrol and diesel prices, which surged by 6.1% and 5.4% m/m, respectively. Intermediate producer costs rose to 1.7% y/y, reflecting a gradual increase following deflation in the final five months of 2023. Producer inflation is likely to have risen further to just over 5.0% y/y in April, primarily due to increased petroleum product prices, especially petrol and diesel.
Also on Thursday, trade balance data for April will be released. The trade balance surplus was R7.27 billion in March, down from R13.34 billion in February. Exports increased by 1.8% m/m to R164.12 billion, while imports grew strongly by 6.1% m/m to R156.81 billion, resulting in the moderation of the trade balance surplus. Although this data is not seasonally adjusted or annualised, the trade balance surplus was R10.92 billion in the first quarter of 2024, down from R23.30 billion in 4Q23. This aligns with our view that the current account balance deficit should steadily widen this year from -0.4% of GDP in 2022 to -1.6% of GDP in 2023.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 21 May | SA | Leading indicator | Mar | 110.4 | 112.8 |
| 22 May | SA | CPI % m/m | Apr | 0.3 | 0.8 |
| SA | CPI % y/y | Apr | 5.2 | 5.3 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 30 May | SA | Private Sector Credit % y/y | Apr | -- | 5.2 |
| SA | PPI % m/m | Apr | -- | 1.1 | |
| SA | PPI % m/m | Apr | 4.6 | 4.6 | |
| SA | Repo Rate % | May | 8.25 | 8.25 | |
| 31 May | SA | Trade Balance R bn | Apr | -- | 7.3 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 778,956.07 | -0.7% | 6.7% | 4.4% |
| USD/ZAR | 18.47 | 1.5% | -3.4% | -4.0% |
| EUR/ZAR | 19.98 | 1.1% | -2.3% | -3.5% |
| GBP/ZAR | 23.46 | 1.8% | -1.4% | -1.4% |
| Platinum US$/oz. | 1,019.00 | -3.6% | 12.3% | -0.5% |
| Gold US$/oz. | 2,328.37 | -2.0% | 0.3% | 19.0% |
| Brent US$/oz. | 81.36 | -2.3% | -8.0% | 3.8% |
| SA 10 year bond yield | 11.26 | 0.3% | -2.8% | -3.8% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.6 | 1.2 | 1.5 | 1.6 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 0.7 | 1.3 | 1.3 | 1.5 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 4.2 | 4.0 | 4.2 | 3.6 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.7 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.9 | 4.7 | 4.6 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 8.00 | 7.50 | 7.50 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.50 | 11.00 | 11.00 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.70 | 17.70 | 18.30 |
