Reserve Bank slightly more positive about inflation, but Transnet crisis now serious threat

Even after annual consumer inflation shocked the market on the upside on Wednesday, rising to 5.9% in October – higher than any economist surveyed had forecast – the Monetary Policy Committee kept the country's repurchase rate on hold for the third consecutive meeting at 8.25% on Thursday. This was in line with estimates from the nine economists reviewed by News24.

Holding the rates became possible after the Reserve Bank's gross domestic product outlook improved; spending by firms, households, public corporations and general government remained positive in real terms on an annual basis; the disposable income of households was expected to grow; the investment forecast for the year was revised up to 7.7% in September; and credit growth to households and corporates slowed, but remained positive.

Furthermore, better monthly outcomes led to a marginal downward revision in the MPC's forecast for core inflation to 4.8% in 2023, from 4.9% previously, and to 4.6% in 2024 from 4.7%. 

"Headline inflation for 2023 is revised down slightly to 5.8%, from 5.9%. The headline inflation forecast for 2024 is 5.0%, down from 5.1%, before stabilising at 4.5% in 2025 and 2026, Reserve Bank Governor Lesetja Kganyago added at the MPC meeting in Pretoria on Thursday.

But the operation of ports and rail has "become a serious constraint" and South Africa’s inflation rate remains sensitive to shocks, he said.

Problems at Transnet have caused significant delays with respect to cargo ships docking at SA's ports and offloading goods and the big freight companies are starting to talk about bypassing SA altogether, said Kim Silberman, economist and macro strategist at Matrix Fund Managers. This could become "a structural inflation problem as the supply of imported goods reduces." 

"While volatile in recent weeks, oil prices have increased over the year and commodity export prices have moderated further. South Africa’s external financing needs will increase as the current account deficit expands, Kganyago said. Compared to September, fuel price inflation is broadly unchanged for 2023, but lowered from 5.8% to 3.2% in 2024. Our food price inflation forecast for 2023 remains high at 10.6%, from 10.4%. The forecast for 2024 is slightly higher at 5.5%."

That said, fuel prices are poised to decline in December, providing some relief at the petrol pumps for travellers.

"We should see some relief amid sharp declines in the fuel price and think that headline CPI could print close to 5% in December. However, renewed food price pressures, alongside material upside risks from El Niño, suggest that food price dynamics are likely to be less supportive of disinflation in SA," HSBC said.

In the fiscal 12 months to October, the price of potatoes more than doubled, the price of eggs rose 36% and staples in an average basket of goods in SA such as rice, white sugar, onions, tea and spinach all climbed more than 20%, according to the Pietermaritzburg Economic Justice & Dignity Group’s (PMBEJD) research.

South Africans are in for a tough time because "inflation only dips to 5.2%, in our view, in December, and that’s not enough for a cutting cycle", said Gina Schoeman, managing director, SA economist, and head of research at Citi. And it’s not just that, she added.

"Add in the stress of load shedding, lacklustre jobs, poor service delivery and the upcoming elections."

With all of this, and as expected by economists, the Reserve Bank did have a hawkish tone on Thursday. The MPC said serious upside risks to the inflation outlook remained and that it would stand ready to act should risks begin to materialise.

With the committee not due to meet again until late in January, the focus will be on US economic data, particularly inflation and jobs data, said Annabel Bishop, chief economist at Investec.

She added that against that backdrop, "market players are building up their appetite for risk-taking, with further rand strength expected as no further US interest rate hikes occur."