After breaching the upper end of the African Reserve Bank’s 3-6% target band last year and reaching a 13-year high of 7.8% yoy in July, consumer inflation appears to be easing, although the outlook for 2023 is maintained. uncertain.
The latest data released by Statistics South Africa (StatsSA) on Wednesday showed inflation cooled for a second straight month to 7.2% yoy in December from 7.4% a month earlier, and economists said it was on trend. to the downside although the central bank’s monetary policy committee (MPC) would have to remain “vigilant” for it to return to the target range.
At first glance, the December inflation figures are encouraging, said Kevin Lings, chief economist at Stanlib.
“They are moving in the right direction. If you go back to July of last year, that was the peak of inflation and we’re down from that peak. It is moving lower and should move lower over the course of this year,” Lings said.
However, he cautioned that upside risks remained.
“With an increase in electricity of 18.65%, that raises the inflation forecast of the Reserve Bank itself. When electricity goes up, it causes price pressures in other parts of the economy. Manufacturers now have to pay more, companies are generally paying more and they have to consider whether to convey some of those price pressures and there will be that desire, but they can’t convey it all because the economy is weak and the consumer is weak,” he said. lings.
“We expect inflation to be 5% by the end of the year. But at this point, we can’t be sure that’s going to happen because if electricity prices had gone up 9% instead of 18%, I would have been confident.”
Last week, South Africa’s National Energy Regulator (Nersa) granted Eskom an 18.65% rate hike to help it cover its debt.
Investec chief economist Annabel Bishop agreed with Lings that higher electricity costs would hamper progress in reducing inflation.
“Looking ahead, South Africa will see upward pressure coming from the larger-than-expected 18.65% rise in electricity prices, with Stats SA typically capturing the annual electricity price rise for July CPI inflation.” “Bishop wrote in a note.
It added that risks to the outlook included a weaker-than-expected rate of GDP growth, as a severe reduction in electricity loads and a further loss in investor confidence persist this year.
Without a sharp rise in fuel prices or another shock, inflation could fall to 4.3% year-on-year in July from 4.9% year-on-year in June, Bishop said, citing a high base from the comparative year when inflation peaked. Maximum point. in up to 13 years due to fuel and food prices.
Nedbank economists forecast average inflation of around 5.5% for 2023, compared with 6.9% in 2022 and 4.6% the year before. Rising food and gasoline prices were the main culprits last year, due to Russia’s war against Ukraine.
Nedbank said risks to the inflation outlook remain to the upside, stemming mainly from the world price of oil, the vulnerable rand and administered prices, particularly electricity rates.
“The South African National Energy Regulator has given Eskom permission to increase electricity prices (and) while this was less than the 32% increase the power company wanted, it will still contribute significantly to inflation. These factors could cause inflation to stay high for longer or recede at a much slower pace,” the bank said.
Sanisha Packirisamy, an economist at Momentum Investments, said inflation would return to the target band by mid-year and fall to just below the 5% mark by the end of the year.
monetary policy committee
The central bank’s MPC expects inflation to remain above the upper limit of its target range until the second quarter of 2023. The Reserve Bank is expected to continue raising rates, albeit at a slower pace, until it is confident when inflation will return to the midpoint in its forecast horizon.
The MPC will hold its first meeting of the year next week. It will probably prompt another interest rate hike of about 25 basis points, Lings said.
“The MPC will send a message that it recognizes that there has been progress in controlling inflation, but there are risks due to the increase in electricity and therefore it will probably push for another interest rate increase, but a modest one,” he said. .
“Then they must be vigilant because you cannot be satisfied that inflation is going to return to the target. If it gets back on target perfectly, they could cut rates by the end of the year.”
Bishop predicted a 50 basis point rise.
According to Packirisamy, there are a couple of things influencing the monetary policy committee’s decisions at the moment, including a weak dollar, which has helped emerging market currencies appreciate.
“The market was looking for larger increases of around 50 basis points. I would say that now the market has changed and expect increases of 25 basis points. We think we will probably get a 50 basis point cumulative for the first quarter, meaning 25 basis points in January and 25 basis points in March,” Packirisamy said.
“Beyond that, I think it will start to negatively impact growth without having a significant impact on inflation given that in South Africa inflation has been higher due to exogenous food costs, exogenous gasoline costs and fuel costs.
