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SA inflation to ease gradually in the coming months
Headline inflation is expected to have eased for the second consecutive month in May, to 6,7% yoy from 6,8% in April. Despite the slow deceleration in CPI, it is still projected to remain at an elevated level of 6,4% in 2023 (annual average) before easing to 4,9% in 2024. Risks to these estimates are to the upside, particularly to the estimate for 2024.
SA import and export price inflation is slowly catching up with the global trend
Import and export unit value indices released for March reflect SA export price inflation that were sharply lower, at 3,5% yoy compared to 9,5% yoy in February. Import price inflation, however, remained elevated, at 11,2% yoy in March (up from 10,6% in February). Nevertheless, the recent strengthening of the rand will likely result in lower import price inflation in the coming months.
Food inflation dependent on the rand and load shedding in the near term
The exchange rate is one of the key drivers of imported food costs. SA imports around 25% of its food consumption, and this, combined with higher operating costs locally (due to load shedding), kept local food and beverage inflation elevated at 13,9% yoy in April. We estimate a gradual decline in food inflation in the coming months, off a high base, and due to a stronger rand recently.
60% of the components in the CPI basket are still above the 6% upper target band
One reason why SARB maintains a hawkish tone and why we expect another 25-basis-point (bps) hike by SARB in July is that most of the inflation basket is still facing price increases above its 6% upper target level.
Monetary policy surprises and the yield curve
We measure the impact of upward surprises in inflation on the yield curve via SARB’s policy response. Our estimates suggest that for every 50 bps that the repo rate is higher (lower) than what the market is pricing in, SA’s 5-year bond yield moves higher (lower) by around 25 bps and the 10-year bond yield by 20 bps.