South Africans were served some good news this morning when it was revealed that the annual headline inflation rate decreased in June, but they should not hold out for more of the same tomorrow.
The Monetary Policy Committee (MPC) will meet to decide whether the repo rate should be increased, decreased, or kept the same, and while there is some belief that the declining inflation may see a stable repo rate, economists are not convinced this will be the case.
Hopeful, yes, but not convinced.
“My feeling is that this will be a close call, and we are likely to see the MPC more divided,” says Angelika Goliger, chief economist at EY Africa.
“But I still think that a 25bps increase is on the cards.”
Although prices are generally moving in the right direction globally, she says the inflation war is still being fought, with some components of inflation – such as food prices in South Africa, remaining high.
“The US Federal Reserve is expected to hike its benchmark rate by a final 25bps, so the MPC would likely want to support the Rand through its rate decision."
FNB senior economist Koketso Mano says above target inflation expectations over the period to 2025, as well as funding risks related to a widening current account deficit amid tighter global financial conditions, should result in the MPC delivering another 0.25% hike tomorrow.
However, the falling probability of an extended resumption of interest rate hikes in the US, the improvement in the rand since the previous MPC, and slower credit demand and inflation outcomes that are now within the target range should soften any further upside risk to interest rates.
This will allow a sooner end to the interest rate hiking cycle.
“In fact, the latter could potentially justify a pause to the hiking cycle as early as tomorrow,” he notes.
Prof Steven Koch, head of the department of economics at the University of Pretoria and editor of the South African Journal of Economics, is not entirely certain of which way the MPC will swing, but believes that the repo rate could hold steady tomorrow. That would be his guess.
“On principal at least, they should not raise it further, but I wouldn’t expect them to lower the rate. Most prices are coming down because of the fuel price but I am still not convinced that prices have stabilised (enough for the rate to come down).”
Goliger says the lower inflation we are seeing in South Africa today is a testament to the South African Reserve Bank’s (Sarb) hawkish stance to date.
“With today’s inflation print of 5.4% in June, we are comfortably below the upper limit of the Sarb’s target of 6%. Further good news is that food price inflation has also slowed.”