Consumer activity in South Africa is expected to ramp up significantly in the final three months of this year on the back of the central bank easing the cost of borrowing as the rate of inflation comes down much faster than expected.
This comes as the headline inflation has cleared the path for the SA Reserve Bank (SARB) to begin its interest rates cut cycle, after four years of restrictive policy decisions.
The SARB is expected to cut rates by 25 basis points to 8.00% per annum next month for the first time following a cumulative 425 basis points increase since the beginning of the hiking cycle in November 2020 as it has raised rates to a 14-year high of 8.25% per annum.
Old Mutual Group chief economist, Johann Els, said the SARB should be more forward-looking as the economy was weak and there was no demand pressures in inflation.
Els said the probability that the SARB might actually opt for a 50 basis point cut at one of the last two remaining Monetary Policy Committee (MPC) meetings had significantly increased, particularly at the back of lower inflation and an expected 50 basis points cut by the US Federal Reserve (Fed) next month.
“Do we really need to drive consumer spending into recessionary conditions in order to fight the cost increases that we’ve had earlier this year in terms of petrol price increases and other external price increases?” asked Els.
“I expect the Fed to cut by 125 basis points over the last remaining three meetings of this year in the US and the SARB will now definitely cut in September. That cut might be a 50 basis point cut. If not 50 basis points in September, then the probability of a 50 basis point cut in November rises substantially.
“This will also mean that inflation expectations fall heavily. Rate cuts should have happened in July. They must now happen and they must accelerate.”
Data from Statistics South Africa (StatsSA) yesterday showed that inflation fell for the second month to 4.6% in July, the softest since July 2021, down from 5.1% in June after holding steady for 10 months in the 5–6% range.
The July inflation print, which was largely driven by slowing food inflation, transport, housing and utilities prices, was much lower than the market’s forecast of 4.9%.
The reading also meant that headline inflation edged closer to the SARB’s 4.5% midpoint of the 3-6% target range, and it is expected to ease even further with the fuel price decrease experienced in August.
Standard Bank economist, Shireen Darmalingam, said the July inflation print, along with the September print, were two important inputs that the SARB will consider before making their interest rate decision in September.
“We maintain our long-standing expectation (0:35) that the SARB will start to ease monetary policy from the next MPC meeting.
“We still foresee 425 basis point interest rate cuts at consecutive meetings and we concur with the SARB’s forecast that inflation will trend around the midpoint of the target range of the medium term and we see scope for inflation to fall even below the SARB’s forecast in the near term. That is later this year or early in 2025,” Darmalingam said.
“Our interest rate forecast is premised on our expectation for a further easing in headline inflation to trend around the inflation target midpoint in the medium term and the US rate cuts foreseen from September this year.”
According to StatsSA, the annual rate for food and non-alcoholic beverages was 4.5% in July, down from 4.6% in June, registering a slowing inflation trend since its most recent high of 9.0% in November 2023 and is currently at its lowest since September 2020 when it was 3.8%.
Fuel prices also receded for a second straight month, declining by 3.6% in July following a 4.6% decrease in June.
North West University’s Business School economist Professor Raymond Parsons said the cost-moderating trends were now being further reinforced by factors such as the present strong performance of the rand and the continued prospect of lower fuel prices.
With core inflation now at 4.3%, Parsons said this suggested that South Africa was moving closer to low and stable inflation if current trends persist.
“Lower inflation trends have, therefore, now developed earlier than the forecasts of the last MPC meeting. It would now be difficult for the MPC to justify keeping interest rates unchanged in the face of the much improved inflationary outlook.
“The table is, therefore, being clearly set for an initial cut in interest rates when the MPC meets again next month. Although the rate reduction may only be 25bps at this stage – and no silver bullet for low growth – it would begin a welcome cycle of easing borrowing costs for business and consumers.”
However, FNB senior economist Koketso Mano warned that headline inflation could be broadly sideways in August as any monthly pressure on food and utility costs are contained by the continued fall in fuel prices.
“The risk is that geopolitical tensions flare up, lifting the risk premium on commodity prices and keeping logistical costs elevated,” Mano said.
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