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Inflation in South Africa is now below the bottom of the band.
And what has driven it lower?
This is the big question.
And what is the forecast going forward?
Now to enlighten us is Vivian Tabra, Investment Director at 91 in Cape Town.
It's interesting, isn't it, the whole inflation story with the backdrop of
what's going on globally, Vivian, because to me,
inflation in South Africa certainly seems well under control.
Yes.
I think in South Africa, we do have inflation well under control.
And certainly, we've had inflation surprising to the downside consistently
now over the sort of medium term.
And if we look at what's driving that, I mean, obviously, we have had until that
recent spike up, although it has recovered,
we have had relative strength in the RAND, which has helped.
We've had contained oil prices.
Those have fallen even lower.
So that is helping.
And then on the back of that, we also have very subdued demand.
There's just not really...
that much growth in South Africa.
So all of those are contributing towards lower inflation.
So it's not just a stable RAND and a fiscal policy.
It's also to do with the fact that we're just not buying stuff, to put it crudely.
Yes, we are.
I think, you know, the South African consumer is under pressure.
If you look at sort of the credit extension that we have in the country,
it's very, very subdued.
So there's just no demand-driven inflation.
Right.
The South African Reserve Bank will obviously be watching inflation, as it
always does, plus other things.
But when it...
also looks overseas.
It looks at the US Federal Reserve this week, keeping rates on hold,
despite the fact that the market is expecting three rate cuts this year from
Jerome Powell and his team.
The Bank of England cut to four and a quarter percent also this week.
That was expected.
What about the SARB?
Because I think the markets and market participants are expecting two cuts this
year.
Yes.
So I think maybe let's just take a little step back there if we look at what's
happen to inflation.
So So what is the SARB going to do is very much going to be a function of where it
sees inflation going.
And as we know, with a very hawkish bias, where they see the risks.
So firstly, let's look at inflation.
So inflation now surprised quite substantially low, coming in at 2.7% in
the last print,
expected to be 2.9.
And in terms of our own forecasts, we're looking for inflation to maintain that two
handle for the next three months
before then rising modestly.
So we're looking at it.
average inflation going forward for this year of 3.1%.
Now, the Saab has consistently been higher than the market,
and they've consistently been too cautious on where they think inflation is going to
be.
And we think that'll continue to be the case.
So, you know, after the last number, their inflation forecast for this year was
sitting at 3.4,
and that's been revised down, as far as we know, to around 3.4% from what Lisset just
said.
That's going to come lower again when we get to the meeting.
in the latter part of this month.
But the key question is, how is the SARB going to look at that?
And will they continue to look at what's happening globally and global uncertainty
and continue to focus on the risks for
inflation to be on the upside?
And, you know, although we think with given where inflation is, there's plenty
of room for them to cut already.
It's certainly not a dead cert that they are going to be cutting in May.
And in fact, you know, we're thinking they might even err on the side of caution
again and only go in July.
That's interesting that you say too cautious.
Is too cautious in your mind because of hindsight, the benefit of hindsight,
or is it because that's the way Lissetia goes about his business?
I think it's a little bit of both.
But I mean, we still, you know, in terms of inflation forecasts, it has been to the
downside,
coming to the downside across all market participants this year.
It has surprised lower than that.
But even in those forecasts before, Before we had the surprises lower, there was room
to cut.
So there is this caution and this focus on the risks, on what could drive inflation
higher,
and very much a focus on what the RAND could do.
Okay.
The South African Reserve Bank is a pillar of stability, even though it is, in
certain people's minds,
a little bit too cautious, a little bit too hawkish.
Are you happy with the job they're doing at the moment, given the backdrop of
international uncertainty?
I think international uncertainty does lead to South African uncertainty, so you
can understand some reticence there.
But in South Africa, we have very low growth, very low credit demand, and they
do have space to lower.
So I think, you know, I'm not the only person in the market.
There are lots of people here that wish they had cut earlier, that we could try
and stimulate demand a little bit,
because South Africa does need growth and it does need jobs.
Do you think that a cut, even if it's only 25 basis points, hopefully it would be 50
basis points do you think
It will do what you've just described, in other words, stimulate growth, because
there have been occasions in the past when cutting hasn't stimulated growth.
It will help stimulate growth.
I think obviously there are other factors that have led to downward growth revisions
this year, but every little bit does help.
And certainly we do know that the consumer in South Africa is very much on the
pressure.
Given what we've just discussed, Vivian, what does this mean for fixed income
investors in South Africa?
Well, I think in terms of fixed income investors, we can expect base rates to
come lower.
We, together with the rest of the market, are penciling another two rate cuts.
If sort of global uncertainty and tariffs lead to lower growth than is anticipated,
pushes the US into a recession, then we could even see a bigger cycle.
So we see at a minimum those two cuts and then we see...
rates being on hold for a fairly substantial period of time.
Vivian, thank you very much for your analysis.
Vivian Tabor is Investment Director at 91 in Cape Town.
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