Bad news about inflation and interest rates in South Africa

Lesetja Kganyago

Inflation will most likely remain higher for longer due to increased load-shedding, a weaker rand, tight labour markets, and increased electricity and water prices.

This was revealed in the South African Reserve Bank’s (SARB) latest Monetary Policy Review, released in April.

Inflation increased markedly in 2022, averaging 6.9% across the year. This was above the 4.5% average in 2021.

The Consumer Price Index (CPI) peaked at a 13-year high of 7.8% in June 2022 and moderated to 7.1% in March 2023.

However, the rate in March was higher than in February – indicating inflation may be here to stay.

The SARB cautioned that the “deceleration in headline inflation will remain sluggish” in 2023, only returning to its 4.5% midpoint in 2025. “Risks, however, are tilted to the upside,” it said.

Food inflation, in particular, has intensified, reaching 14% in March and showing no signs of slowing.

The SARB said this is due to structural issues in South Africa, such as load-shedding and deteriorating logistics infrastructure.

These issues and a weakening rand have meant that a global decline in food prices has not occurred in South Africa.

The broad-based nature of food inflation is more concerning, with 90% of the basket tracked by the Reserve Bank increasing above 6%.

Bread and cereals, for example, are up 20.3% compared to a year ago. However, this is likely to come down in the medium term.

Momentum Investments estimated that load-shedding alone will add 1.1% to inflation in 2023. This is mainly due to the increased costs of companies running generators as backup power sources.

Electricity generated by a diesel generator costs roughly 133% more than municipal electricity. These costs will be passed on to customers.

In a research note, Momentum Investments said that “stagflation risks have materialised” in South Africa.

Stagflation is an economic cycle characterised by slow growth and a high unemployment rate accompanied by inflation.

Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate another.

Momentum expects core inflation to remain elevated for longer, with many of the structural issues driving inflation unable to be solved by interest rate increases but by government reform.

Inflation staying higher for longer will result in higher interest rates for longer as it is the Reserve Bank’s only tool to reduce inflation.

Below are Momentum’s expectations for the SARB’s repo rate following the release of the Monetary Policy Review.


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