Latest inflation numbers give room for South African Reserve Bank to cut repo-rate in mid-November

Annual headline consumer price inflation surprisingly fell to 4.1% year-on-year (y/y) in September 2019, down from 4.3% in August 2019. This marks the 30th consecutive month that inflation has remained within the South African Reserve Bank (SARB)’s inflation target range of 3% to 6%. The last time inflation rate was outside of the SARB’s inflation target range was in March 2017 when it was recorded at 6.1%. Most analysts surveyed by Bloomberg were expecting headline inflation to remain unchanged at 4.3% during the period under review.

Source: Author, compiled from Stats SA data

Product groups with the largest weighting in the inflation basket, including food and non-alcoholic drinks products group had the most influence in the reduction and keeping the headline rate at modest levels in September 2019. Food inflation (excluding non-alcoholic beverages), which has been identified by the South African Reserve Bank as one of the risks to the upward headline inflation, decelerated slightly to 3.7% in September 2019, from 3.8% in August 2019. If non-alcoholic beverages category is included, total food inflation remained unchanged at 3.9% in September 2019.

Poor harvests are responsible for the significant increase in the prices of grain related products in the past year. The costs of bread and cereals rose by 8.5% y/y in September 2019, compared with 8.6% in August 2019. Super maize (a staple for millions of South Africa’s poorest people) prices increased by 15.7% y/y in September 2019, while that of special maize rose by a significant 31.3% during the same period. Brown bread prices, on the other hand, were up by 7.6% during the period under review.

Food and non-alcoholic inflation (CPI perspective)

Source: Author, compiled from Stats SA data

With the normalization in the meat industry after increased supplies in the domestic market, resulting from a ban of meat exports by neighbouring states out of fear of foot and mouth disease, we are starting to see an increase in meat price inflation. Meat price inflation rate slightly accelerated to 1.1% in September 2019, from 0.7% and 0.2% in August and July 2019, respectively.

In its last meeting in September 2019, the South African Reserve Bank Monetary Policy Committee alluded that the future rate decisions will remain data-dependent. Therefore, the latest moderation of inflation in September 2019, as well as the benign headline inflation outlook, strengths the argument for the Central Bank’s Monetary Policy Committee to join the move globally towards lowering interest rates when it meets for the last time this year between 19th and 21st November 2019.

However, this might not be the case as the vigilant nature of the Reserve Bank could also mean the rate stays unchanged. Whilst the inflation result for September 2019 and ongoing weak economy activity domestically may tilt in favour of a repo rate cut in November 2019, such an outcome is far from certain given the elevated fiscal risks in South Africa and rising global market volatility.

Tebogo Mashabela is an Agricultural Economist by profession with two master’s degrees, Master of Science (MSc) Agricultural Economics and Master of Business Administration (MBA).

Latest inflation numbers give room for South African Reserve Bank to cut repo-rate in mid-November
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