Consumers can breathe a sigh of relief as the Consumer Price Index (CPI) noted that headline inflation eased to 4.6% year-on-year, down from 5.1% in June, but does this bode well for an interest rate cut?
Yesterday, Statistics South Africa (StatsSA) said that this drop marks the lowest inflation rate in three years, matching the annual 4.6% rate recorded in July 2021.
Casey Sprake, an investment analyst at Anchor Capital noted that in recent months, core inflation has remained relatively stable, consistently hovering around the midpoint of the South African Reserve Bank’s (SARB) target band of around 3 to 6%.
Impact on interest rate
Sprake said that looking ahead, she anticipates a further decline in inflation over the remainder of 2024, potentially dropping below 4.5% by the fourth quarter.
“This anticipated decline in inflation, along with expected interest rate cuts starting towards the end of this year, is likely to boost consumer sentiment further,” she explained.
“Naturally, the timing and extent of these anticipated rate cuts depend on the inflation outlook, locally and abroad and global interest rate developments as we progress towards the end of the year.
“At this stage, we expect an initial rate cut of 25 bps in September, followed by a further 50- to 75-bp worth of cuts in 2025 and leading into 2026,” Sprake added.
Political parties react
The African National Congress (ANC) said on Wednesday that it welcomed the decline of the annual consumer price inflation.
The party noted that the decline in the CPI indicated that food prices, a significant component of the index, have decreased and this will be a relief to many South Africans.
“This lower inflation environment could provide more flexibility for a reduction in interest rates. Lower interest rates, in turn, would ease the cost of credit for households and increase disposable income,” Zuko Godlimpi, the ANC acting national spokesperson said.
“This would potentially boost consumer demand in the economy and, coupled with lower borrowing costs for businesses to expand output, will stimulate economic growth and employment,” he added.
The Economic Freedom Fighters (EFF) criticised the SARB on Wednesday and noted that the tools the organisation uses is misguided.
“The EFF maintains that the monetary policy instrument implemented by the South African Reserve Bank since July 2022, when it increased the repo rate from 4.75% to 5.50% and continues to increase to date, was misguided,” the party said in a statement.
“The Reserve Bank adopted this tool based on outdated and backward orthodox monetary policy, despite calls for an unconventional and broadened approach, given the high levels of unemployment, inequality, and poverty, which have negatively affected demand,” the EFF said.
The party also noted that the economy has not grown by more than 2% in any quarter over the past 10 years, except during the post-Covid period when restrictions were relaxed. They argue that this was not due to new economic activities and that South Africans continue to lose their jobs.
The EFF argued that the economy is not growing, no new jobs are being created, and no new factories are being built.
As such, the party has called on the Reserve Bank and the Monetary Policy Committee to abandon the unemployment-inducing policy of high interest rates that continue to suffocate a struggling economy.
The EFF wants the bank to cut interest rates by 150 bp at the next meeting in September and bring the repo rate down to 6.75%.
“Failure by the committee to reduce the interest rate will continue to suffocate the economy, leading to more job losses, erosion of assets and savings, and increased financial burdens on workers who are already struggling with high repayments on bonds, vehicle loans, and other debts,” the EFF said.
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