The further drop in South Africa’s headline inflation rate, to 3.1% y/y in December, coming alongside the recent tightening of virus containment measures supports our view that the Reserve Bank will cut interest rates at Thursday’s MPC meeting.
Inflation edges down, rate cut likely on Thursday
- The further drop in South Africa’s headline inflation rate, to 3.1% y/y in December, coming alongside the recent tightening of virus containment measures supports our view that the Reserve Bank will cut interest rates at Thursday’s MPC meeting.
- Data released this morning showed that South Africa’s headline inflation edged down for a second consecutive month, from 3.2% y/y in November to 3.1% y/y in December. The outturn was in line with the consensus, albeit a little stronger than our projection for inflation to drop to 3.0% y/y.
- The breakdown of the data showed that food inflation rose again, reaching 6.0% y/y in December – its highest reading since mid-2017. (See Table 1.) Fruit and vegetable inflation dropped back but this was more than countered by a pick-up in inflation of meat, fish and bread products. Meanwhile, health and clothing inflation also edged higher last month.
- But inflation pressures were unchanged or eased in most other price categories. Housing and utilities inflation dropped from 2.9% y/y in November to 2.7% y/y in December, it lowest reading on the current series that goes back to 2009, due to a weaker rise in imputed rents. Transport inflation edged down as a stronger rand more than offset a further increase in global oil prices. Core inflation held steady at 3.3% y/y.
- We expect headline inflation to pick-up over the first half of this year, peaking at around 5.0% y/y in May. Food inflation is likely to remain elevated and the overwhelming driver of the rise in inflation will be higher transport inflation due to the unfavourable base effects created by last year’s collapse in global oil prices. The weak economic backdrop means that underlying price pressures are likely to remain subdued.
- Nonetheless, while it will be a very close call, December’s weak inflation reading supports our view that the Reserve Bank will decide to cut interest rates at Thursday’s MPC meeting. While there are early signs that South Africa’s second wave of COVID-19 may now have passed its peak, the recent tightening of virus containment measures has darkened the near-term outlook. We think that the balance on the MPC is now likely to have tipped in favour of further easing and have pencilled in a 25bp rate cut, to 3.25%.
Chart 1: South Africa Consumer Prices & Policy Rate
Sources: Stats SA, SARB, Capital Economics
Table 1: South Africa Consumer Prices
Source: Stats SA (*) Includes non-alcoholic beverages
Jason Tuvey, Senior Emerging Markets Economist, firstname.lastname@example.org