Inflation might be down, but don't get your hopes up for an interest rate cut just yet
Inflation has eased to 2.7%, but geopolitical risks are likely to weigh heavily on upcoming repo rate discussions.
Image: Henk Kruger / Independent Newspapers
Even though the rate of increase in the cost of living declined by 0.5 percentage points year-on-year in March – beating expectations – the Reserve Bank will remain cautious about cutting interest rates next month due to current geopolitical tensions.
Yet, the central bank may see room to start cutting rates marginally from around the middle of the year, according to Old Mutual's chief economist, Johann Els.
Els said that the Consumer Price Index (CPI) surprised on the downside, coming in at 2.7% in March instead of his anticipated 3%. The February figure was 3.2%. 'So, significantly lower than expected by me, anybody out there in the market, and by the Reserve Bank,' he said.
Elna Moolman, Standard Bank Group Head of South Africa Macroeconomic Research, said that inflationary pressure remains quite benign, vindicating the Reserve Bank's decision to cut rates last year. However, she said it doesn't remove all the Bank's concerns about medium-term upside pressure on inflation given global tariff concerns.
Despite the welcome number, Els believes that the South African Reserve Bank will be cautious at the next Monetary Policy Meeting (MPC) on May 8, when they consider interest rate cuts. This, he explained, is given all the global uncertainty created by Trump's tariff positioning now.
'I think the Reserve Bank will welcome these lower numbers, but they will keep rates unchanged at their next MPC meeting, given all the global uncertainty at the moment,' Els said.
However, Els does see room for the Reserve Bank to cut rates around July again. 'For the moment, I think there's going to be one more 25 basis point rate cut, but there might be room for two 25 basis point rate cuts, given the low trajectory of inflation over the next few months.'
Els explained that 'the lower-than-expected March number means that, during the second quarter, the April, May, and June numbers could be around 2.5%. Lower than what I previously expected, and definitely lower than the Reserve Bank's latest forecast,'
Lower inflation was seen across almost all categories and, while food inflation crept up a bit, it was well contained at 2.2%, said Els. Food inflation, especially in maize, was a notable driver of February's inflation figure.
Els also noted that, given the fact that alcoholic beverage prices increased at a slower rate than expected, the sin tax increase in the latest budget didn't seriously affect that number. He added that clothing, shoes, fur, appliances and vehicle inflation were all well contained. 'So, there's no consumer price pressures out there,' said Els.
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