CPI slows in April to 5.2% y/y, but no South African rate cut expected before late 2024

The read at 5.2% was slightly below market expectations of 5.3%, which is good news. This is the second month in a row that consumer inflation has moderated. 

Pointedly, food inflation slowed year-on-year to 4.4% in April from 4.9% in March, which will ease the squeeze on household incomes, notably for those in the lower-income brackets. This is perhaps good news for the ruling ANC before next week’s general elections. 

“Overall, there remains increased uncertainty about South Africa’s consumer food inflation path for 2024, with some upside risks in various products... Our primary concern remains the grains-related products in the food basket because of the domestic poor white maize harvest and the potential upside pressure on prices. South Africa’s white maize harvest is down 25%,” Wandile Sihlobo, chief economist at the Agricultural Business Chamber, said in a note on the data. 

Among food items that have been in the news, egg inflation declined for the fifth straight month but remains on the boil at 25.1%. 

While the inflation trajectory is positive, it remains in territory that the South African Reserve Bank (Sarb) finds discomfiting. 

Its target range is 3% to 6% and it has strongly signalled that it prefers consumer inflation in the middle of terrain, and expressed its preference for a 3% target. This would bring South Africa’s inflation goals more in line with advanced economies such as the US, where the inflation target is 2%. 

“Despite this better-than-expected outcome, with the Sarb increasingly signalling its preference for a 3.0% point inflation target, we expect no policy rate easing until November,” Razia Khan, chief Africa economist at Standard Chartered Bank, said in a commentary on the data. 

This view was echoed by other economists. 

“Ultimately, headline inflation is expected to average above the 4.5% target this year. This means that monetary policy should remain unchanged for most of the year... We currently only see a potential 25 basis point cut at the Sarb’s last meeting for the year,” said Koketso Mano, FNB senior economist. 

The Sarb’s key lending or repo rate is currently 8.25%, with the prime lending rate for consumers at 11.75% – levels that have held since May 2023. 

South African inflation is the key driver of the Sarb’s monetary policy stance, and among the factors that influence both is US interest rates. The gap between South African and US rates lends support to the rand through mechanisms such as the carry trade, which involves borrowing in a lower-interest currency to buy one that provides a higher rate. 

By helping to prop up the rand, this in turn helps to curb imported inflationary pressures in South Africa. 

The US Federal Funds interest rate is currently in the 5.25% to 5.5% range and the US Federal Reserve is not seen cutting before September – which is another reason many economists don’t expect the Sarb to wield the scalpel before November. From the chart below, you can see how South African interest rates have moved in lockstep with the Fed. 





Having said that, the rand has shaken off jitters about the 29 May elections and recently reached its best levels in almost 10 months. Further gains could also give the Sarb some room to move – but only if inflation is also firmly anchored around the midpoint of its target range. 

“... more pronounced ZAR gains, perhaps by way of a post-election rally in South African assets – if considered long-lasting – could conceivably influence the inflation outlook sufficiently to allow for earlier easing,” Standard Chartered’s Khan said. DM