South African consumers navigate a rapid rise in living costs and a swelling cost of credit in 2023.
The Reserve Bank’s monetary policy committee (MPC) will hold its last meeting of the year to decide on interest rates this week. Key to the MPC’s decision on interest rates will be the outcome of consumer price index (CPI) inflation. Inflation is expected to have risen much closer to the Reserve Bank’s upper limit of its 3% to 6% target range in October.
The MPC has kept the repo rate elevated at 8.25% to contain inflation, which has started rising again for two months in a row starting in September. Inflation edged up to 4.8% in August and rose to 5.4% year-on-year in September. The market consensus is that this week’s CPI print will show another increase to around 5.7% year-on-year in October.
Chief economist and head of research at RMB Isaah Mhlanga said oil prices were the main culprit behind the rising inflation.
Oil prices remain the driver for rising inflation, clearly depicted by the continuing drop in core inflation (excludes food and energy prices), which is expected to fall to 4.2% year-on-year in October from 4.5% in September
Last month, the rate of increase in the petrol price eased to 4.6% on a monthly basis from 7.5% in September as the price of Brent crude oil edged lower. However, there are increasing expectations that OPEC+ countries will cut Brent crude production when they meet next weekend. This move will probably see petrol prices go up again at the beginning of the year, depending on the exchange rate. The weak rand has contributed to South African motorists paying record prices for fuel.
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Food prices have shot up locally because of, among other things, the weak exchange rate and bird flu that has caused widespread devastation in the domestic poultry industry and saw huge increases in egg and chicken prices.
But Nedbank economist Isaac Matshego said the trajectory would begin to change for the food basket. “Food prices are expected to have moderated further off a high base, still benefiting from the lagged effect of lower global food prices and contained by shrinking household demand on Wednesday.”
Unchanged rates
The MPC is widely expected to keep interest rates on hold on Thursday. Households’ disposable incomes have come under immense pressure from high food and fuel prices as well as high-interest rates that have increased the cost of credit. Some reports have suggested that consumers were spending about 65% of their disposable on servicing debt, potentially increasing bad debts.
Mhlanga said consumers will likely have to wait until the second half of 2024 when the Reserve Bank is forecast to start cutting interest rates. He said more focus will be on governor Lesetja Kganyago’s tone when he delivers the MPC statement on Thursday.
We do not see the SA Reserve Bank hiking rates further; however, there are upside risks from the higher risk premium due to the higher debt ratio. We expect the Reserve Bank to maintain the repo rate at the current level until the end of the first half of 2024 before they start cutting from July 2024.
“Core inflation is currently trending in line with the SARB’s 4.5% target, indicating a notable easing in underlying price pressures. Despite some upside risks to the outlook, the underlying environment has become more supportive of lower domestic inflation in the months ahead. Consequently, we expect no further rate hikes for this year, with the repo rate staying at 8.25% and the prime lending rate at 10.75%,” Matshego added.
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