Statistics South Africa (Stats SA) reports that consumer price inflation decreased from 4,6% year-on-year (y-o-y) in February to 4,1% y-o-y in March 2020. Inflation averaged 4,4% during the first quarter compared to a South African Reserve Bank (SARB) forecast of 4,5%.
Inflation is not a prominent point of analysis in South Africa at the moment with greater emphasis on the outlook for the economy and employment. However, consumer price dynamics are still being considered by the central bank as it looks at monetary policy tools to support the local economy.
A major driver behind the decrease in March’s headline inflation was disinflation in the transport component of the consumer basket. Fuel costs were 1,6% month-on-month (m-o-m) lower, resulting in a 1,7% m-o-m decline in the overall cost of transportation. Petrol and diesel prices declined by 19c/litre and 5c/litre, respectively, on March 4. This was largely as a result of lower international products prices, with a weaker rand eroding some of the potential benefit to motorists. As a result of lower fuel prices, transport was only 3,4% y-o-y more expensive in March compared to a reading of 6,2% y-o-y in the preceding month.
The SARB Monetary Policy Committee (MPC) announced on April 14 it had reduced interest rates by another 100 basis points, following an identical move on March 19. The central bank commented that the extension of the national lockdown (until April 30) will result in a greater economic contraction in the short term as businesses stay shut for longer and households spend less. The central bank now expects the South African economy to contract by 6,1% in 2020 – a sharp deterioration from the 0,2% decline forecast just three weeks ago.
On the inflation front, the SARB commented that the much weaker economic growth outlook coupled with low oil prices have resulted in a downward revision in its inflation forecasts. (The central bank expects Brent oil to average $42 per barrel this year). Consumer price inflation is forecast by the SARB to average 3,6% in 2020; this is close to the bottom end of the 3% to 6% target range. Combined with the weak economic outlook, this low inflation outlook makes room for significant monetary stimulus to the broader economy. The MPC commented that the overall risks to the inflation outlook appear to be to the downside at present.
Looking ahead, the MPC statement indicated that the central bank’s internal modelling suggests room for a further five interest rates cuts of 25 basis points each over the coming 12 months. However, given the speed at which the local and global environment is changing at present, it is not impossible for the SARB to make another big (ie. larger than 25 basis point) rate cut in the near future. Of course, as policymakers always warn, the outlook and current rate cut suggestions are highly dependent on economic data. The exchange rate, for example, is one of the factors that could pressure the cost of imported inflation in coming quarters.
