Statistics South Africa (StatsSA) reported on 24 January that consumer price inflation increased from 4.6% year on year (y-o-y) in November 2017 to 4.7% y-o-y in December. This resulted in full-year inflation declining to 5.3% last year from a mean of 6.4% in 2016. The latest inflation number is the ninth consecutive monthly reading falling within the South African Reserve Bank (SARB) target range (3%-6%). The StatsSA report can be view here.
The rise in y-o-y inflation was in part associated with a rise in local fuel prices. Transportation costs accounted for 0.9 percentage points of inflation in December from 0.6 percentage points in the previous month. Fuel was on average some 4.2% month-on-month (m-o-m) more expensive in December, with the first Wednesday of the month seeing an increase in pump prices as a result of higher international commodity prices as well as a weaker rand. Fuel prices were 14.2% higher y-o-y as South Africans headed off for holidays, with private transport being 11.9% more expensive y-o-y.
The benchmark food basket cost 4.9% y-o-y more – the smallest increase in two years. According to StatsSA, the average prices of bread, cereals, oils & fats, fruit and ‘other food’ is now lower than a year ago.
In contrast, meat is on average 14% y-o-y more expensive. Livestock production in various parts of the country has been adversely affected by drought conditions: feed and water shortages resulted in large-scale culling, translating into domestic red meat supply declining as farmers struggle to rebuild herds. There were also some seasonal factors at work, with higher demand over the holidays also affecting prices.
The SARB Monetary Policy Committee (MPC) met on 17-18 January 2018 to consider interest rates, and policymakers decided in a 5:1 votes in favour of keeping the repo rate unchanged at 6.75% ‑ only one MPC member favoured a 25 basis points reduction.
While the central bank lowered its inflation projections for 2018 and 2019 to 5.2% and 5.5%, respectively, it identified upside risks to the projections. The largest risk factor is the prospect of further sovereign ratings downgrades, which will result in a significant outflow of money from the domestic bond market and an accompanied weakening in the rand.
SARB Governor Lesetja Kganyago indicated that internal modelling suggested the repo rate must be lifted by at least 50 basis points by end-2019. This implied path “remains a broad policy guide and could change in either direction by the next meeting in response to new developments and changing risks.” Nonetheless, the split in voting at this month’s MPC meeting, upside risks to inflation, and internal modelling guidance at the SARB suggests that a reduction in interest rates is not on the cards at present.
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