Real reason South Africa’s inflation dropped

Economist Dr Roelof Botha said South Africa’s inflation is cooling despite the South African Reserve Bank’s (SARB) interest rate hikes, not because of them.

The SARB decided to pause its current hiking cycle at its most recent Monetary Policy Committee meeting and keep the repo rate at a 14-year high of 8.25%.

This is the first time the SARB has paused this cycle, having implemented ten consecutive interest rate hikes since November 2021.

The SARB’s decision followed a cooling of South Africa’s consumer price inflation (CPI) to 5.4% – its lowest point in almost two years.

However, the Reserve Bank said this is not the end of the hiking cycle, as several upside risks to inflation remain a concern.

SARB Governor Lesetja Kganyago said they believe the country’s inflation has yet to peak.

However, Botha told eNCA that it is “fairly obvious” that South Africa’s CPI has peaked.

The producer price index has come down from more than 18% in July 2022 to just above 7% in May 2023.

“We do not have demand inflation in South Africa,” he said. Instead, local and global inflation has peaked and declined due to other factors outside the SARB’s control.

According to Botha, the number one reason the world has been battling with inflation over the past few years is because of a 700% increase in global freight shipping rates.

He said these costs went from US$1,200 for a 40-foot container to $10,400 in the space of two years. Now, the price has dropped back to $1,400.

The second reason for the world’s battle with inflation is the oil price. Botha said the West Texas Intermediate has dropped by 40% in the past year.

The third reason Botha gave for South Africa’s cooling inflation was the weaker US dollar and rand strength. 

“There’s been a risk on sentiment coming back into the market because everybody expects the US rate hike cycle to have ended, so they’re willing to buy emerging market bottoms and stocks again,” he said.

“That’s the reason why inflation has dropped – not because of the Reserve Banks’ interest rates, despite the Reserve Bank’s high interest rates.”