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Inflation softens in March, but interest rates to remain high

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CONSUMERS should brace for a prolonged period of elevated cost of living as the South African Reserve Bank (SARB) is unlikely to temper its monetary policy after headline inflation remained stubborn on the back of rising education fees.

Data from Statistics SA (Stats SA) yesterday showed that the rate of annual consumer price inflation (CPI) softened to 5.3% in March, down from 5.6% in February.

Stats SA said core inflation recorded a modest decline, from 5.0% to 4.9% in March.

This disinflation trend in the headline was better than expected decline of 5.5%, and is expected to continue as the year progresses, albeit at a slower pace.

Stats SA said the categories with the highest annual price changes in March were miscellaneous goods and services, education, health, and housing and utilities.

Stats SA surveys education fees once a year in March, and the results showed that the cost of education, especially for high schools, had risen by more than the rate of inflation, which averaged 6% for 2023.

Stats SA’s director for price statistics, Patrick Kelly, said that overall, education was 6.3% more expensive in 2024 than it was in 2023, when it increased by 5.7%.

“This is the highest increase since 2020 when it rose by 6.4%. High schools recorded the largest educational increase in 2024, up 7.3%, followed by crèches increasing by 6%,” Kelly said.

“Primary schools and tertiary institutions were both up by 5.9%. University boarding is on average 8.2% more expensive than it was a year ago.”

Last month, the SARB had already warned that its baseline forecast showed the policy rate normalising later as headline inflation was now forecast to reach the target midpoint of 4.5% only at the end of 2025, later than previously expected.

The SARB is targeting inflation to drop from the upper limit towards the midpoint of the target range before it can relax its restrictive monetary policy stance of 8.25% per annum, with the prime lending rate currently at 11.75%.

Compounding this picture is the US Federal Reserve which left the fed funds rate steady at a 23-year high of 5.25%-5.5% for a fifth consecutive meeting last month.

Capital Economics economist for Africa, David Omojomolo, yesterday said the larger-than-expected fall in headline inflation rate would not be enough to sway the SARB from starting its easing cycle.

“While the fall in headline inflation will be welcomed, it will not be nearly enough to prompt the SARB to adopt a less hawkish tone. Officials have placed a large emphasis on the need for headline and core inflation rates to move towards the 4.5% midpoint of its target inflation range,” Omojomolo said.

“Even with inflation set to continue falling, interest rate cuts are likely to begin until well after the election is out of the way. We expect the first interest rate cut to start from September, with 50 basis points of cuts by the end of the year.”

Stats SA also said that food inflation softened to a three-and-a-half-year low in March, as prices for food and non-alcoholic beverages fell to 5.1% from 6.1% in February.

This is down from its recent peak of 14.0% in March 2023, and is the lowest annual increase since September 2020 when the rate was 3.8%.

On a monthly basis, headline inflation rose by 0.8% in March, after a 1% increase in February.

FNB senior economist Koketso Mano said she expected headline inflation to remain flat at 5.3% in April as monthly pressure eased to 0.3%.

Mano, however, said fuel inflation should continue to rise following the over 60c/l increase in petrol prices this month, and should also impact broader transport costs.

“While we foresee food inflation softening towards the middle of the year, there is a likelihood that lower yields following hostile weather conditions will revive price pressures,” she said.

“Furthermore, heightened tensions in the Middle East could weigh on oil supply, posing an upside risk to fuel and logistical costs. The rand is also adversely affected by hawkish monetary policy rhetoric in the US. All of this could keep inflation much stickier than anticipated.”

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