What South Africa’s lowest consumer inflation in 15 years means for interest rates

Inflation as measured by the consumer price index (CPI) fell again in May 2020, reflecting the decline in fuel prices as well as the impact on the economy of lockdown measures introduced to curb the spread of Covid-19, notes Novare Investments.

Stats SA showed on Wednesday (15 July), that CPI in May slowed to 2.1% year-on-year, from 3.0% in April and 4.1% in March. The fuel index was 25.9% lower than it was in May 2019.

On a month-on-month basis, inflation fell 0.6%.

The annual reading for May 2020 is the lowest since September 2004 and means inflation has fallen to below the lower end of the Reserve’s Bank 3% to 6% target band that guides interest rate policy.

The figure has been at or below 4.5%, the middle of the range, for 18 months.

Benedict Mongalo, chief investment officer at independent fund manager, Novare Investments, said: “The biggest contributor to the decline in inflation in May was the fall in fuel prices.

“While subdued economic demand is likely to continue placing downward pressure on the consumer price index in the short-term, this may not herald further interest rate cuts to help lift economic activity by reducing borrowing costs.”

Interest rates

Mongalo said that there is an expectation that inflation could pick up over the months ahead.

“This, combined with the SA Reserve Bank’s view that rates have already been cut quite aggressively, means that today’s inflation data may not to lead to additional rate cuts – unless GDP growth expectations are adjusted downwards again.”

The macro research team at Momentum said that the latest data leaves space for a further rate cut.

“In our view, decimated demand and anchored inflation expectations leave room for the SA Reserve Bank  to ease interest rates by up to a cumulative 50 basis points in 2020,” it said in a note on Thursday.

“Given front-loaded bolder policy decisions taken earlier in the year, we could see the Sarb move to increments of 25 basis points.”

Luigi Marinus, portfolio Manager at PPS Investments, said that the lack of demand within the economy is evidenced by the inflation rate.

In addition, the speed by which the inflation rate has moved from the midpoint of the target band to below the bottom of the band, notwithstanding the sizable interest cuts that the South African Reserve Bank has implemented, highlights the lack of growth and the need for growth in South Africa.

“This provides more scope for additional interest rate cuts that at these inflation levels are almost inevitable,” he said.

So far this year, the Reserve Bank has cut interest rates by 275 basis points, to 3.75%.

The Monetary Policy Committee of the SA Reserve Bank is scheduled to meet again from 21 to 23 July 2020 to review interest rates.

Welcome relief

Mongalo noted that, while additional rate cuts would be welcomed by business and cash-strapped consumers whose debt would cost less, pensioners dependent on interest earned from savings will appreciate a reprieve in the rate cutting cycle.

Cuts announced so far this year have erased about one-third of their interest earnings, he said.

The lockdown had placed pressure on supply chains – the systems and processes involved in bringing products and services to consumers, Mongalo said.

This meant that Stats SA was unable to collect all price data used to calculate the CPI basket and, in April and May, had to impute prices for certain items to calculate CPI. These items make up 23.7% of the basket.

In this regard, Stats SA commented that the comparison of prices of a fixed set of consumer goods and services in two periods is at the heart of measuring inflation.

“The Covid-19 lockdown restrictions and gradual normalisation have posed particular challenges for the calculation of the CPI. Special imputation methods were used to account for the absence of consumer expenditure on certain CPI basket items.”

Producer inflation, which measures prices at the farm and factory gate, is also expected to have moderated to around 1% year-on-year, from 1.2% previously. PPI figures are due to be published on Thursday.

---

Read: South Africa’s GDP likely shrunk by 32.6% during lockdown: Reserve Bank