Although the inflation rate increased in October, economists believe there is still a chance of a repo rate cut
Inflation increased slightly by 0.2% to 3.6% in October from 3.4% in September. Now the big question is whether the Reserve Bank will cut the repo rate on Thursday and give consumers a little more breathing space ahead of the festive season.
Jee-A van der Linde, senior economist at Oxford Economics Africa, says the uptick in the October inflation rate was slightly lower than they expected, suggesting that a 25 basis points cut to the repo rate is on the cards this week.
“Inflation is likely to continue rising gradually over the coming months and remain above the upper band of South Africa’s 3% inflation target. South Africa’s overall inflation outlook remains benign, supported by a stronger rand and favourable international oil prices.
“We forecast inflation to average 4.0% next year, with the headline rate hovering above the newly set inflation target of 3% with a tolerance band of one percentage point.
“After the latest price data, we still expect that the South African Reserve Bank (Sarb) will cut the repo rate by 25 basis points this week. It will be a tight call, with deliberations likely to centre on either holding policy or implementing an incremental rate cut.
“The consensus forecast favours the repo rate cut. Market sentiment towards South African assets is overwhelmingly positive at the moment, which is supporting the inflation transition. Our analysis shows that if inflation improves, the repo rate could fall to 5.0% over the medium term.”
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There is likelihood of a repo rate cut
Koketso Mano, senior economist at FNB, the slight increase in inflation was slightly below their and the market’s expectation of 3.7%. “With this latest print in mind, we see headline inflation moving relatively sideways over the next few months.
“In November, inflation could average 0.1% month-on-month and 3.7% year-on-year. This uplift could be supported by higher food and non-alcoholic beverages inflation, while changes in core inflation should be marginal and fuel inflation softens.
“Ultimately, headline inflation should remain below 4% over the next year, remaining well within the tolerance band before softening towards 3% over the medium term. Core goods inflation should remain soft over the near term, supported by a stronger rand as well as favourable import shifts from a price perspective.”
She says this will compensate for normalising services inflation, which should keep the overall core number around 3%. “While external trade dynamics suggest that goods inflation could surprise on the downside, services inflation, which could be considered the core within core, of around 4%, as well as sticky administered price inflation could keep the Monetary Policy Committee (MPC) conservative.”
However, Mano says the positive boost from a reform-driven Medium-Term Budget Policy Statement and a sovereign ratings upgrade with a positive outlook could do much to reduce risk premiums and trend depreciation in the real value of the rand.
“This could mean that interest rates required to sustain capital inflows and balance the economy need not be as high and monetary policy could be shifting into more restrictive territory. This, alongside the appropriate level of restrictiveness required to uphold the shift in the inflation target, is top of mind ahead of the November MPC meeting, where a hold is prudent, but the likelihood of a cut is material.”
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Room for a 25 basis points repo rate cut
Busisiwe Nkonki and Johannes Matimba Khosa, economists at the Nedbank Group Economic Unit, say they expect inflation to trend higher off a low base, ending the year just below 4%. “The upward pressure will mainly emanate from food.
“Food prices will remain elevated until the end of the year as meat prices remain high due to the lingering impact of foot-and-mouth disease and the delay in vaccinations. However, the upward pressure will partly be contained by good harvests, which will benefit from favourable weather conditions.
“At the same time, falling global food prices and a firmer rand will contain the import component. The International Monetary Fund forecasts global food prices to decrease by around 6.1% in 2025, reinforcing the moderation in local food inflation early in 2026.”
They point out that another source of inflation will be from fuel prices, although the upward pressure will likely be moderate. Subdued Brent crude oil prices and the broadly firmer rand exchange rate will help to contain fuel inflation, although price pressures could emanate from renewed rand weakness, they say.
“The inflation outlook remains broadly subdued. As a result, we believe there is room for a 25 basis points repo rate cut tomorrow to bring the real rate closer to neutral.”
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Inflation increased less sharply than forecast
Mark Phillips, head of portfolio management and analytics at PPS Investments, says inflation increased less sharply than forecast ahead of the upcoming interest rate decision on Thursday.
“Economists surveyed by Reuters projected annual inflation would reach 3.7% in October, compared to 3.4% previously. Forward-rate agreements currently indicate a 72% probability of a 25 basis point reduction in the repo rate.
“It suggests inflation remains contained and slightly below expectations, reinforcing confidence in the Sarb’s credibility, which could support bond prices and ease borrowing costs.”
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Increased chance of a repo rate cut
Sanisha Packirisamy, chief economist at Momentum Investments, says the acceleration in the October headline inflation rate was anticipated and was mostly due to low base effects. “The trend of accelerating inflation is expected to continue moderately throughout the year, largely due to fuel and housing inflation, before decelerating next year.”
She also believes that chances for an interest rate cut at the upcoming November MPC meeting, with the Sarb looking through the expected short-term bounce in inflation, increased substantially due to the adoption of a lower inflation target and a supportive backdrop for the rand.
“Local factors contributing to the strength in the rand included the credit rating upgrade by S&P Global Ratings, partly in response to a prudent budget and continued reforms. South Africa was also removed from the Finance Action Task Force’s greylist, contributing to further investor confidence.
“Chances for an interest rate cut at the upcoming November rate-setting meeting, with the Sarb looking through the expected short-term bounce in inflation, have increased substantially due to the adoption of a lower inflation target and a supportive backdrop for the rand.”
