By Tebogo Mashabela
On 18th July 2019, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) unanimously decided to reduce the repo policy interest rate by 25 basis points (bps) to 6.5% citing among others a lack of domestic inflationary pressures. This can be seen in the latest inflation figures, which show that headline consumer inflation remained steady at 4.5% (i.e. midpoint of 3% to 6% inflation target) year-on-year (y/y) in June 2019, unchanged from the May 2019 figure of 4.5%.
The main contributors to the steady 4.5% annual inflation rate was a sharp increase in housing rentals in the face of a seemingly weak housing market (driven largely by weak overall poor economic activity and household disposable income) as well as a second consecutive monthly increase in food inflation.
Food prices, which remain an important risk to inflation outlook, have expectedly started accelerating recently. Food inflation (excluding non-alcoholic beverages) accelerated for a second consecutive month to 3.2% y/y in June 2019, from 2.8% in May 2019 and 2.3% in April 2019, which was the food inflation rate level that prevailed during the first four months of this year. If one looks at a broader category that includes non-alcoholic beverages, food inflation accelerated to 3.7% in June 2019, from 3.2% in May 2019. The increase in the food inflation rate was not totally unexpected as for some time there has been shortage of meat as a result of farmers rebuilding herds after drought and the Foot and Mouth Disease (FMD) that affected meat prices.
Meat inflation rate decelerated over the past couple of months on the back of an increase in domestic supplies as a result of local suppliers being forced to sell to the domestic market instead of exporting because of a ban of exports by neighbouring states out of the fear of the effects of FMD in Limpopo. With FMD now been eliminated, we are seeing meat industry normalising, thus resulting in meat inflation beginning to accelerate. The meat inflation rate accelerated to 0.3% in June 2019, from – 0.9% in May 2019.
Another important food component that drove an acceleration in food inflation during the review period was milk, eggs and cheese. Milk, eggs and cheese inflation rate accelerated to 2.1% y/y in June 2019, from 1.2% in May 2019 on the back of relative shortage of dairy products. In addition, the oil and fats inflation rate accelerated to 3.5% in June 2019, from 3.0% in May 2019, its highest level in almost two and half years. The inflation rate for sugar also accelerated to 8.2% in June 2019, from 6.8% in May 2019 and 5.2% in April 2019, taking it to its highest level in two years. This could be as a result of an increase in sugar tax (first implemented in 2018), also known as Health Promotion Levy ((HPL), in April 2019.
On a positive note, the annual inflation rate of bread and cereals decelerated slightly to 7.3% in June 2019 after reaching the highest of 7.8% in May 2019. Drought conditions during the planting period in the north-western regions of the country, mainly North West and Free State, caused staple food commodity prices such as maize and soya to rise quite strongly over the past few months, hence the high inflation rate of 7.3% in June 2019.
Headline inflation is expected to remain around the mid-point of the Reserve Bank’s target band of 3% – 6%. Lower fuel price pressure (on the back of a hefty 95 cents per litre drop in the petrol price in July), slowing wage growth and a sluggish local economy are the main reasons there is little inflationary pressure, and as such expectation is inflationary pressure would moderate further in July 2019. The Reserve Bank lowered its inflation forecast for 2019 to 4.4%, from 4.5% at its Monetary Policy Committee meeting late last week, saying that risks to the outlook are balanced, even as there may be upside risks from the financing of state companies and global shocks.
Food inflation will likely begin to increase substantially in coming months influenced by expected lower grain output this season compared with output of the last season. Crop Estimate Committee (CEC)’s fifth production forecast shows that a total of around 13.0 million tons of summer grain (i.e. maize, sunflower seed, soybeans, groundnuts, sorghum and dry beans) is expected this season, which is 14.2% (or 2.14 million tons) lower than that was produced in 2018. Maize output is so far expected to be 12.6% (or 1.57 million tons) lower compared to the 2018 output. The lower maize output expected for this season is therefore likely to result in rising food inflation as maize (especially yellow maize) is an important feed component for the meat industry. The Reserve Bank expected food inflation to start rising from the end of 2019, thus peaking at 5.6% in the second and third quarters of 2020.
Tebogo Mashabela is an Agricultural Economist by profession with two master’s degree, Master of Science (MSc) Agricultural Economics and Master of Business Administration (MBA).