South Africa’s inflation eased – but big interest rate hikes from SARB still expected

South African inflation eased for a second straight month – from 7.60% in August 2022 to 7.50% in September.

The latest data from Statistics South Africa revealed that prices eased for transportation, driven by falling fuel costs.

Meanwhile, price pressures strengthened for other CPI items, including food and non-alcoholic beverages, housing and utilities, restaurants and hotels, and goods and services.

Annualised core inflation, which excludes food, non-alcoholic beverages, fuel, and energy prices, rose to a five-year high of 4.70% in September 2022.

Despite the decrease in inflation, it is unlikely to sway the South African Reserve Bank (SARB) from raising interest rates in November.

Adriaan Pask, CIO at PSG Wealth, highlighted that inflation remained above the upper limit of the SARB’s target range of 3% to 6%.

SARB governor Lesetja Kganyago said local borrowing costs would only be lowered when inflation retreat toward the midpoint of the central bank’s target range is sustained.

“Once you see inflation declining back within the target and moving toward 4.5%, that would be telling you that the interest rate cycle has done its job,” he said.

Pask said while it is encouraging to see a second consecutive decline in CPI, higher inflation expectations and depreciating currencies continue to reinforce the pressing need for central banks to accelerate the normalisation of their policy rates, tightening global financial conditions.

“On balance, capital flow and market volatility are expected to remain elevated for emerging market assets and currencies,” he said.

The median estimate of 22 economists in a Bloomberg poll conducted last month predicted a half-a-percentage point increase after back-to-back 75 basis-point hikes.

Luigi Marinus, portfolio manager at PPS Investments, said the market would assume we have seen the peak inflation level and the trend will be lower going forward.

“The hawkish stance of the South African Reserve Bank will continue as South African and global inflation remains high,” Marinus said.

“Therefore, an additional rate hike can be expected before the end of the year.”