South African Reserve Bank’s hawkish inflation outlook justifiable – PPS

PPS Investments portfolio manager Luigi Marinus said the South African Reserve Bank’s hawkish stance on inflation is justifiable, with inflation above the top end of its target band.

Marinus was commenting on the latest consumer price inflation data, which increased by 6.9% year-on-year in January 2023. It was lower than the 7.2% year-on-year print in the previous month.

It signals a continuation of the decline in inflation growth since the peak of 7.8% in July 2022. Month-on-month inflation increased by 0.1%, compared to the 0.4% increase in December.

Although there was a decline in inflation growth, food and non-alcoholic beverage prices increased by 13.4%.

Even though food and non-alcoholic beverages make up 17.14% of the inflation basket, the contribution was a third of the total inflation increase over the year.

Other large contributors to inflation were transport (1.6%) and housing and utilities (1%).

The recent declines in fuel prices have moderated the effect of transport on overall inflation. However, public transport still saw an 18% increase as rising costs have been transferred to consumers.

The effect of the approved electricity price increase is yet to be included in the inflation print and will add to inflation when it comes into effect.

“The South African Reserve Bank has remained hawkish in its stance, which is justifiable with inflation above the top end of the target band,” said Marinus.

In the most recent Monetary Policy Committee (MPC) meeting, they decided to only increase short-term interest rates by 25 basis points.

“It may be seen as a signal that the hiking cycle is reaching an end,” he said. “However, markets are pricing in another 25 basis point increase.”

“Another 25 basis point increase could signal the end to rate hikes, assuming that inflation continues on its downward trajectory back into the target band.”

FNB senior economist Koketso Mano said an update of today’s data points to headline inflation remaining unchanged in February.

“We should see upward monthly pressure driven by the lift in fuel prices, as well as survey outcomes on health-related services that should lift core inflation,” she said.

Throughout 2023, fuel inflation should soften relative to last year, albeit at a slower pace than previously anticipated, given the expected lift in oil demand that should follow China’s reopening.

Food inflation should be sticky, given elevated local input costs. Core inflation should continue to lift as second-round effects permeate the consumer basket.

“On average for this year, we predict headline inflation of 5.8%,” Mano said.

Global inflation continues to slow, the latest data from the US showed inflation easing slightly to 6.4%, from 6.5% previously, the slowest pace since October 2021.

Weaker global economic activity and easing supply chain pressures should continue to support softer inflation this year.

However, fragmentations such as export restrictions, sanctions as well as reshoring of business operations should be lingering consequences of escalated geopolitical tensions.

These, along with transient inflation from the move towards cleaner energy, should keep global inflation sticky and above pre-pandemic levels for some time.

The spillover of these factors to South Africa will be exacerbated by local production issues so long as the electricity constraint remains binding on the economy.