Statistics South Africa (Stats SA) reported on 19 February that consumer price inflation increased from 4% year-on-year (y-o-y) in December 2019 to 4,5% y-o-y in January 2020.
Lullu Krugel chief economist for PwC Strategy&, and Dr Christie Viljoen, PwC Strategy& economist, analyse the numbers.
The latest reading was higher than a median expectation of 4,3% y-o-y surveyed amongst local economists.
However, January’s inflation number was below the 4,8% average that the South African Reserve Bank (SARB) forecast for the first quarter of 2020.
Regular below-forecast inflation readings has enabled the central bank to ease monetary policy over the past six months at a time where economic growth and household finances are under significant pressure.
The major driver behind the increase in inflation during January was transport cost. However, this was largely due to base effects in the y-o-y calculation as a result of the sharp drop in local fuel prices in December 2018-January 2019.
The ‘miscellaneous goods and services’ index also made a small contribution to the higher headline inflation reading as inflation on the sub-component for financial services climbed from 3,6% y-o-y in December 2019 to 6,2% y-o-y in January 2020.
Banking fees and accessibility are back in focus after the President Cyril Ramaphosa said in his State of the National (SONA) 2020 that the government will proceed with the establishment of a state bank as part of efforts to extend access to financial services to a wider part of the population.
The SARB Monetary Policy Committee (MPC) most recently met in January 2020 to discuss interest rates and decided to cut the repo rate by 25 basis points (bps) to 6,5%. This was the second interest rate reduction in six months following an identical cut in July 2019.
Policymakers welcomed lower inflation outcomes and continued moderation in inflation expectations. The MPC added that their improved inflation forecasts opened some space for additional monetary policy easing.
The implied path of interest rates- as generated by the central bank’s Quarterly Projection Model – indicate scope for another 25 bps cut in the repo rate later this year.
However, the central bank has also warned that higher sovereign risk generates exchange rate and inflation risk in the future.
SARB Head of Economic Research Chris Loewald told Parliament on February 18 that a higher South African country risk premium creates upward pressure on interest rates.
His comments came on the same day that Moody’s Investors Service revised down its economic growth forecasts for South Africa. A weaker growth outlook automatically inflates fiscal and debt ratios – to the detriment of sovereign risk ratings.
Moody’s – the only major ratings agency to still afford South Africa and investment-grade rating – is widely expected to downgrade South Africa this year. However, there is still a lot of debate over the timing of the downgrade.