Inflation has eased to an 11-month low, having slowed to 6.8% year-on-year in April — down from 7.1%.
Economists forecast that consumer price inflation would come in slightly higher, with the consensus expectation coming in at 7%. But data from Statistics South Africa showed that inflation hit its lowest level since May last year, when the rate was 6.5%.
According to the data, annual food inflation — which hit a 14-year high in March — eased slightly to 13.9%, down from 14%. Moreover, transport recorded its ninth successive month of disinflation in April, softening to 7.6%, StatsSA noted. This was mainly because the annual rate for fuel easing fell to 5%, the lowest reading since March 2021.
Despite having eased, the headline inflation rate is still well above the ceiling of South African Reserve Bank’s 3% to 6% target range. According to the South African Reserve Bank’s monetary policy review, headline inflation is forecast to return to the target range in the third quarter of 2023, but to the midpoint of the target range only in 2025.
The inflation data comes ahead of the Reserve Bank’s repo rate decision on Thursday. In the wake of the rand’s recent tumble, economists have flagged the increased likelihood of the Reserve Bank hiking the repo rate by another 50 basis points.
The rand strengthened ahead of Wednesday’s inflation data, but it still held above R19 against the dollar.
Before the recent bout of currency weakness, the Bureau for Economic Research (BER) said it had expected a 25 basis point hike, signalling the end of the tightening cycle. Even if the Reserve Bank hikes by 50 basis points on Thursday, “it is now less clear whether that will bring the hikes to an end”, the BER said.
Investec chief economist Annabel Bishop said despite a 25 or 50 basis point hike expected this week, an even more aggressive 75 basis point rise is needed to strengthen the rand meaningfully.
Bishop said, interest rates are expected to fall next year, if not by the fourth quarter of 2023. Inflation is forecast to come in lower in the second half of this year compared with the first half and to fall during the course of 2024.
David Rees, senior emerging markets economist at Schroders, said there are three main reasons to believe inflation and interest rates will start to ease. First, fuel inflation has already begun to drop sharply and should fall a bit further before stabilising, he said. Second, the food price inflation may well have peaked. Third, higher interest rates stand to cool economic growth, thus bringing down core inflation.