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You are at:Home » Low Inflation Sparks Hope for Interest Rate Cuts in South Africa
BUSINESS

Low Inflation Sparks Hope for Interest Rate Cuts in South Africa

By mdntvJanuary 10, 2025No Comments3 Mins Read
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South Africa’s inflation outlook for 2025 appears favorable, raising hopes for potential interest rate reductions.

Inflation Below Reserve Bank Target

Consumer Price Index (CPI) inflation dropped to 2.9% in November 2024, significantly below the South African Reserve Bank’s (SARB) midpoint target of 4.5%. Investec Chief Economist Annabel Bishop attributed this to declining fuel prices since June and smaller petrol price increases in the second quarter of 2024.

Inflation Moderates

Bishop highlighted that inflationary pressures in South Africa remain mild, with inflation for 2024 expected to average below 4.5% year-on-year (y/y), a decrease from 5.9% y/y in 2023. For 2025, inflation is likely to remain low, with headline inflation forecasted to average around 4.0% y/y.

Drivers of Low Inflation

The primary factor behind this deceleration is the moderation in fuel prices. Although December and January experienced slight fuel price increases, data from the Central Energy Fund (CEF) indicates that larger hikes could occur due to the rand’s weakness against the dollar and higher international product prices.

Rand depreciation typically results in higher inflation through increased costs of imported goods, posing a potential risk to South Africa’s overall inflation outlook.

Food Price Inflation Plummets

Food price inflation, a major contributor to headline inflation, has declined dramatically. It fell to 1.6% in November 2024, compared to 14.4% in March 2023. Lower food prices have played a significant role in curbing inflation, benefiting consumers who faced high costs in previous years.

Bishop noted that weaker demand, high interest rates, and the rand’s relative strength in 2024 have also helped contain inflation across various sectors.

Expectations for Interest Rate Cuts

Bloomberg economists predict that reduced inflation, now within SARB’s 3%-6% target range, provides room for further interest rate cuts in 2025. SARB lowered the repo rate by a cumulative 50 basis points in September and November, bringing it to 7.75%.

Bloomberg Economist Yvonne Mhango forecasts that SARB could reduce the repo rate by another 50 basis points to 7.25% by March 2025, before pausing. She expects inflation to remain in the lower band of SARB’s target range during the first quarter of 2025, gradually reaching the 4.5% midpoint by late 2025 and staying there through 2026.

Potential Risks

Despite these positive signs, SARB Governor Lesetja Kganyago cautioned that external factors, such as the potential re-election of Donald Trump in the United States, could introduce inflationary risks in South Africa.

Conclusion

With inflation currently under control and expected to stay low, South Africa may see further interest rate cuts in early 2025. However, external economic risks could still challenge the country’s inflation stability.

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