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South Africa's Inflation Hits Four-Month Peak: A Deep Dive

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louis Buyisiwe

Mar 22, 2024

Rising CPI Fuels Central Bank Caution

Forward-rate agreements starting in a month's time show traders aren't pricing in rate cut and in fact see a less than 10 percent chance of 25 basis-point hike. The first chance traders see of a cut is in July  February's price-growth was largely driven by higher transport costs, housing & utilities and food and non-alcoholic beverages.
Symbolyic chart showing South African inflation

In a recent turn of events, South Africa witnessed its inflation rate surge to a notable four-month zenith in February, an occurrence that solidifies the South African Reserve Bank's (SARB) inclination towards maintaining the status quo on borrowing costs in their forthcoming policy deliberation.

A Closer Look at the Numbers

According to an official release by Statistics South Africa, the consumer price index (CPI) escalated to 5.6% on an annual basis in February, marking a noticeable increase from the 5.3% recorded in the preceding month. This uptick surpasses the median forecast of 5.5%, as per a Bloomberg survey of economists, spotlighting a drift away from the central bank's preferred midpoint target of 4.5% for inflation anchoring.

Implications for Monetary Policy

The inflationary pressure, primarily propelled by rising costs in transport, housing, utilities, and food sectors, hints at a more cautious approach by SARB towards interest rate adjustments. Current market sentiment, reflected in forward-rate agreements, suggests minimal expectation of a rate cut, with a less than 10% probability of a hike in the near term. This conservative stance is anticipated to persist, with the central bank's policy rate, currently at a 15-year apex of 8.25%, expected to remain unchanged at the March 27 policy announcement.

Analyzing Bond Market Reactions

The bond market's response to the inflation data was moderately tempered, with yields on government bonds slightly receding post-announcement. This nuanced movement in the bond market underscores the intricate balance between inflationary trends and monetary policy expectations.

What Lies Ahead

As South Africa grapples with these inflationary challenges, all eyes are on the SARB's upcoming policy meeting. With inflation expectations for the current and following year still hovering above the desired midpoint, the central bank's decisions in the near term will be critical in shaping the economic trajectory and investor sentiment.

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