Low inflation could see Reserve Bank hiking cycle end today

Econometrix director and chief economics Azar Jammine said recent positive news that inflation has fallen within the South African Reserve Bank’s (SARB) target range could see the end of the interest rate hiking cycle.

June’s inflation data was released yesterday and revealed that annual consumer inflation (CPI) had dropped to 5.4% – the lowest it has been since October 2021.

This is also the first time in 14 months that the inflation rate has been within the SARB’s target range of 3% to 6%.

Jammine told eNCA that economists were expecting a big drop in inflation, mainly because of the significant decline in fuel prices in the past few months.

Around a year ago, fuel prices had shot up by around R5 a litre. Therefore, on a year-on-year basis, fuel prices are below what they were this time last year.

Despite the decline being expected, Jammine said it was still a greater decrease than he had anticipated. 

This is because the impact of fuel inflation on food inflation – another significant driver of inflation – is often underestimated.

“When fuel prices rise sharply, food producers see this as a huge increase in their cost and pass that on to consumers in the form of higher food prices,” he said.

“It appears as if the opposite is now occurring, and lower fuel prices are contributing to lower-than-expected food inflation.”

Another factor that influences food inflation is load-shedding, which was far less intense in June compared to the first few months of the year. 

“Economists were spectacularly amiss in not forecasting that load-shedding would increase food inflation over the past year,” he said.

The final contributing factor to the country’s lower-than-expected inflation was the bounce-back of the rand. 

The rand has recovered by almost 10% against the dollar and by around 5% to 6% against other currencies in the past month, further reducing inflationary pressures.

Jammine said inflation is also forecasted to remain lower as the fuel price effect is expected to last into August.

Faced with this good news, there is a high likelihood that the SARB’s Monetary Policy Committee (MPC) will decide to pause the interest rate hiking cycle and may even end the cycle.

The MPC has been in a hiking cycle since November 2021 and has implemented a cumulative 475 basis points of hikes through 10 consecutive rate hikes. 

This has brought the repo and prime lending rates to 14-year highs of 8.25% and 11.75%, respectively.

The MPC will have its next meeting today and announce its decisions at 15:00 this afternoon.