Statistics South Africa (Stats SA) reported on June 19 that consumer price inflation increased marginally from 4.4% year-on-year (y-o-y) in April to 4.5% y-o-y in May. The latest reading was in line with expectations and also spot on the middle of the South African Reserve Bank (SARB) target of 3%-6%. The latest StatsSA inflation report (available here) confirmed that inflation rates are under control at present and that the SARB has successes in shifting the headline inflation rate away from the upper limit of the target range where it meandered for much of the 2016-2017 period. This adds weight to expectations that interest rates could decline in the short term.
Food price inflation, which was measured at 2.3% y-o-y during each of the first four months of 2019, increased to 2.8% y-o-y in May. This followed a 0.4% month-on-month (m-o-m) increase in the price index for food products. The increase from April to May included a significant increase in potato prices following rains in the Free State disrupting harvest activity. Data from industry body Potatoes South Africa indicated that a 10kg bag of potatoes increased in cost from R37.15 in major municipal markets during the third week of April to R53.29 near the end of the month. Stats SA data indicates that potatoes were on average 7.6% y-o-y more expensive in May. Unsurprisingly, the vegetable category had the highest annual inflation rate within the food basket at 8.0% y-o-y.
Transport cost increased by 7.1% y-o-y in May. Fuel was 11.6% y-o-y more expensive after the petrol price increased by 54c/litre on May 1. This, in turn, was largely caused by higher average prices on international fuel products during April compared to the previous month. Oil prices climbed to their highest levels in 2019 so far during April on the back of buoyant economic data from China, a decline in reported US fuel stocks, and a tight global supply situation. Production by the Organisation of the Petroleum Exporting Countries (OPEC) has fallen to a five-year low as headwinds to the global economy pressured producers in the Middle East to reduce output.
From a monetary policy perspective, the SARB will be happy to see headline inflation remain near the mid-point of the 3%-6% target range. The Monetary Policy Committee (MPC) decided at a meeting last month to keep interest rates on hold, though two out of the five members of the committee were in favour of a cut in interest rates. At the same time, the implied path for interest rates generated by the SARB’s Quarterly Projection Model pointed to a 0.25 percentage points cut in interest rates by March 2020. Keeping with this positive stance, SARB Governor Lesetja Kganyago said in a speech on June 12 that current inflation and economic growth expectations suggest the central bank might have room to cut interest rates “over the next year or so”.
However, it must be noted that when the MPC holds its next meeting in mid-July, the SARB’s head of policy and research, Christopher Loewald, will join the committee as its sixth member. Loewald is seen by several analysts as more hawkish when it comes to monetary policy, i.e. favouring higher instead of lower interest rates. This will have an impact on when and by how much interest rates will decline. In contrast, political calls for the SARB to have a greater focus on employment and economic growth – and, by implication, ease monetary policy in order to boost the economy – is unlikely to impact MPC decisions. The SARB mandate already includes consideration for these factors. Looser monetary policy is also not a solution to South Africa’s growth challenges – the challenges are structural in nature.
Article by Lullu Krugel, PwC Strategy& Chief Economist for Africa, and Christie Viljoen, PwC Strategy& Economist
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