KEVIN LINGS: Like the US, SA rates are likely to ease only from the second half

Stubborn inflation means the US Federal Reserve is unlikely to be able to cut interest rates by June as was widely expected at the turn of the year. Instead that is now slated for later,  which will influence other global central bankers, including SA.

Last month consumer inflation in the world’s largest economy rose by 0.4% month on month, in line with market expectations, and by 3.2% year on year (3.1% year on year in January). Core inflation also increased, by 0.4% (3.9%), which was above expectations for a rise of 0.3%.

Initially, the upside surprise in US inflation had only a modest effect on markets, perhaps in part due to a continued big increase in housing costs, which is considered a lagging indicator of overall inflation trends.

However, the upside surprise in consumer inflation, coupled with the far higher than expected producer price inflation data later in the week, as well as stronger than expected weekly jobless claims, did unsettle bond and equity markets.

This week Stats SA released inflation figures for February, which show headline consumer inflation rose by a substantial 1% month on month, which was above market expectations of 0.9%. In addition, core inflation surged by 1.2% in the month, above the 1% expected.

Though higher fuel prices were partly to blame, it was the much bigger than expected increase in the cost of medical inflation that did most of the damage.

The monthly increase in consumer inflation pushed the annual rate of inflation up to 5.6% from 5.3% in January, while core inflation rose to 5% from 4.6%. 

Still, food prices declined by a welcome 0.1% month on month in March, pulling the annual rate of food inflation down to 6% from 7% in February and a recent peak of 14.4% in March 2023. While 6% is still relatively high, the latest outcome and a recent moderation in agricultural and manufactured food inflation is encouraging at the start of the year.

Unfortunately, the heatwave in SA is likely to damage the 2023/2024 summer agricultural season, which could result in some renewed upward pressure on food prices, which needs to be closely monitored.

SA inflation averaged 5.9% in 2023, down from 6.9% in 2022, but higher than the 4.5% of 2021, 3.3% in 2020 and 4.1% in 2019. For 2024, the forecast is 5.2%, though the number is an upward revision from the expected average of 4.9% as recently as December.

Unfortunately, some upside risks to SA inflation remain, including second-round effects related to higher electricity and water prices, the recent upward pressure on the oil/fuel price, rand weakness and a risk that the current heatwave negatively affects food inflation.

However, it is important to note that some of those risks will be mitigated by the already high interest rates as well as the fact that sluggish economic activity makes it more difficult for companies to pass on some of these price pressures.

Those mitigating factors, coupled with an improving outlook for global inflation, could allow the Reserve Bank to start to cut interest rates in the second half of the year.

The trajectory of US interest rates, influenced by inflation trends and economic indicators, may have implications for currency markets. As we monitor these developments it is essential to consider how our monetary policy responses align with global trends and their potential effect on our economy overall.

The ability to manage inflationary pressures and adjust monetary policy accordingly will be key in determining our ability to catch up and navigate the broader economic landscape effectively.

Lings is chief economist at Stanlib Asset Management.