Standard Bank shares good news about interest rates in South Africa

While South Africa’s CPI inflation rose in May, the print was lower than expected, and with tensions in Iran seemingly winding down, it appears unlikely that the Reserve Bank will need to hike interest rates further.

This is feedback from Standard Bank’s head of South Africa macroeconomic research, Elna Moolman.

Her comments come after Statistics South Africa released May’s inflation data, which showed that CPI inflation rose to 4.5%, up from 4% in April.

While a significant acceleration month-on-month, Moolman pointed out that May’s print is marginally lower than many experts predicted.

Prior to the release, many economists expected inflation to accelerate substantially in May as the effects of the Middle East war, particularly higher fuel prices, filtered through to other goods.

Economists were particularly concerned about the effect on food prices, as higher fuel prices tend to raise the cost of food.

However, for May, Moolman said lower-than-expected food prices were behind the downside surprise in the inflation print.

In contrast to many economists’ projections, food inflation was relatively flat in May, up by only 1.6% year-on-year. This was largely driven by declines in meat and fruit prices in May.

Moolman said this should provide some relief to consumers amid the steep increases in fuel prices over the past few months.

The good news does not stop there. Following recent news that the United States and Iran are close to signing an interim peace deal, oil prices have declined.

This, Moolman said, means that the upside risks to the inflation trajectory have subsided.

“It also increases the likelihood that the Reserve Bank will not have to hike interest rates further,” she said.

At its meeting in May, the Reserve Bank’s Monetary Policy Committee voted to hike South Africa’s interest rates by 25 basis points, citing fears of second-round effects stemming from the Iran war.

Reserve Bank Governor Lesetja Kganyago said the committee saw upside risks to inflation, and was particularly concerned about rising fuel and food prices.

The graph below shows the trends in South Africa’s inflation and interest rates from 2021 to now.

Fuel price relief turns into pain

Food prices were not the culprit behind May’s higher inflation print, but higher fuel prices played a significant role.

Investec chief economist Annabel Bishop attributed May’s inflation acceleration to ongoing effects from the second month of diesel and petrol price hikes stemming from the oil price shock of the Middle East war.

She pointed out that the petrol price rose by R3.27/litre and the diesel price by R6.19/litre in May.

“As petrol is the main fuel contributor to CPI, this drove a 0.6% month-on-month lift in CPI from this source alone,” Bishop said.

One saving grace amid these increases was the R3.00 per litre cut in the general fuel levy, which the Treasury introduced in April to partially shield consumers from substantial fuel price increases.

Without this relief, Bishop said the cumulative fuel price increases would have been much higher.

However, she warned that, with June having seen another increase in petrol prices, CPI inflation could hit 5% for this month.

While July is expected to see a cut in fuel prices, with a R2.65/litre cut on the cards, consumers should not get too excited.

This is because any cuts in fuel prices will likely be offset by the planned reversal of the Treasury’s general fuel levy relief, likely leading to a further R1.50/litre increase in petrol prices.

In addition, Bishop warned that it may be some time before oil prices return to their pre-war levels.

“The end of the war in the Middle East has not seen oil prices return to $65/bbl yet, and oil price futures show the Brent crude oil price still above $70/bbl in January next year,” she said. 

Therefore, Bishop believes the Reserve Bank may pause in July, assuming that the US and Iran’s tentative peace deal holds.