Inflation coming down but no interest rate cuts yet, SARB says

Economists at the South African Reserve Bank (SARB) said that despite a drop in inflation it was likely interest rate cuts would only take place next year.

Other factors that have contributed to the pressure on inflation include inefficiencies at Durban’s port and consistent load shedding in 2023.

This was revealed in a presentation by the SARB in Durban on Tuesday following the release of the first Monetary Policy Review for 2024.

SARB economists said that according to the quarterly projection model (QPM), inflation was headed in the right direction but would only be in the target range of 4.5% in 2025.

Economist Marique Kruger said even though headline inflation had gone down from the highs of 2022 and 2023, it was still above the target’s midpoint of 4.5%.

“The data we have indicates that headline inflation has consistently hovered around the 5 to 6% range from September 2023 and that is still the case with the most recent one with inflation at 5.2%.”

Kruger said the forecasts’ evolution over the last four years, looking at the March Monetary Policy Committee (MPC), revealed that the actual inflation outcome has been higher than forecast.

“Specifically around 2021 and 2022 where we had all the local development issues. The main drivers of headline inflation have been food and fuel prices, but recently the forecast and actual outcomes have been more aligned and the forecast is inflation will come down in the near future.”

Pamela Mjandana, lead economist at the SARB, said although they look at the trends of advanced economies, this does not mean there would be interest rate cuts in South Africa if advanced economies cut interest rates.

“If we look at an advanced economy like America, inflation has been elevated and has been pushed up by service inflation. It has started coming down due to international oil prices easing and food prices easing, but it still hasn’t reached the required level for a rate cut.

“We see inflation surging in South Africa and we are different from advanced economies. We are a receiver of shocks spilled over from advanced economies and that is mostly due to the exchange rate; when the exchange rate depreciates it affects inflation. Remember, we also import a lot of oil and that is also impacted by the exchange rate.”

Mjandana said that they can only react to data they have domestically.

“We will only cut interest rates when we see inflation come down and sustainably. Our QPM indicates that inflation will come to the midpoint range in 2025. The QPM also indicates that from now until 2026 that there are four cuts predicted, but that all depends on the inflation rate and external factors affecting it, such as international oil prices and the exchange rate.”

At Durban’s port, inefficiencies affected the rails and logistics sector, putting further pressure on inflation, as did consistent load shedding in 2023.

The World Bank’s (WB) Container Port Performance Index (CPPI) report 2023 ranked the country’s ports as the worst-performing ports in the world.

However, SARB economists said there has been a big improvement in port efficiency by Transnet and a reduction of load shedding by Eskom.

“Here in Durban is one of the biggest ports in Africa and if there is not enough movement of goods it causes bottlenecks and our economy won’t grow as we export a lot of commodities.

We are grateful for the changes made by Transnet to improve efficiency at the ports and rail,” said Mjandana.

Arnold Khosa, another economist at the SARB, said that load shedding had been a hindrance to growth.

“Last year was a bad one for load shedding and it impacted businesses.

There has been an improvement by Eskom as we have not had load shedding for 80 days, and if this persists we are likely to see growth coming on strong. Even at ports and rail, there has been an improvement in 2024 in handling cargo.”

Professor Irrshad Kaseeram of the University of Zululand’s economics department said he agrees with the SARB that inflation needs to be at 4.5% for interest rate cuts to take place.

“A depreciating exchange rate everberates through the entire pricing mechanism.

“SARB is forced to raise the interest rate to preserve the value of the rand, and in recent years SARB, for good reason, has decided to target inflation at the midpoint of 4.5%, hence the signal they have been sending is that they will only lower the interest rate if inflation is below 4.5%. Currently, inflation is at 5.2%.”

The Mercury

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