New inflation data raises concerns about Reserve Bank interest rates

The average headline CPI inflation expectations of analysts, business people and trade unions declined in the third quarter of 2023.

However, their prediction remains outside the South African Reserve Bank’s (SARB) target range, which increases the risk of another interest rate hike. It also means that inflation may remain higher for longer.

The BER/SARB Inflation Expectation Survey for Q3 2023 showed the first drop in average 2023 expectations in two years, as the average inflation prediction in Q3 was 6.1%.

Lower expectations were also evident over the entire forecast horizon (2023 to 2025). This was primarily due to downward revisions by business people and trade unionists – by 0.6 percentage points each for all three years.

Business people expect headline CPI inflation during the year to be 6.3%, down from 6.6% in Q2. Trade union officials expect 6.0%, down significantly from 6.6% the previous quarter.

However, analysts were the exception. They retained their forecast from the second quarter, only slightly down from 5.1% in Q2 to 5.0% in Q3.

These revisions come in light of headline inflation dropping from 6.3% in May to 4.7% in July.

The SARB’s inflation target range is 3% to 6%, but central bank Governor Lesetja Kganyago has said the bank wants to anchor the country’s inflation around the mid-point of this range (4.5%).

The Reserve Bank started its current hiking cycle in November 2021. It has since implemented ten consecutive interest rate hikes before pausing the cycle for the first time at its last Monetary Policy Committee (MPC) meeting in July.

At this meeting, the MPC paused the cycle on the back of positive inflation data, as June’s headline CPI fell within the SARB’s target range for the first time in months.

However, the SARB warned that this was merely a pause in the hiking cycle rather than its end, and the MPC would remain data-dependent when making future decisions about the country’s repo rate.

Therefore, while the inflation expectations in the survey dropped, they still fall outside the SARB’s target range. This could mean more interest rate pain may face South Africans in 2023.

However, over the longer term, inflation expectations are more positive. Average five-year inflation expectations continued to tick down, reaching 5.1% in Q3 from a peak of 5.6% in Q2 2022.

The one-year-ahead inflation expectations of households subsided from a recent peak of 8.1% in Q2 to 7.0% in Q3. Their 5-year expectations declined from 10.7% to 9.8%.

During the third quarter of 2023, the survey respondents, on average, forecasted economic growth to be 0.8% in 2023 before rising to 1.4% in 2024.

This forecast is slightly more optimistic for this year, though similar for next year, compared to the second quarter.

On average, the three social groups expect salaries and wages to increase by 5% in 2023 and gain momentum to 5.4% in 2024. Previously, they expected 5% for both years.