Headline inflation was only expected to return to the midpoint of the target band in the last quarter of 2025, the South African Reserve Bank (SARB) said yesterday in a biannual Monetary Policy Review.
South Africa's inflation target range is 3−6%. The SARB has left its repo rate at 8.25%, unchanged since May 2023, which “remains broadly consistent with persistent inflation, the uncertain domestic and global outlook, and getting back to the 4.5% midpoint over the forecast timeframe”.
The report said that amid slower-than-expected disinflation in food and volatility in fuel prices, headline inflation had fluctuated in the range of 5–6% over the past six months.
“More recently, services inflation has risen sharply as some components normalised. These setbacks suggest that the path back to the 4.5% midpoint of the target band is likely to be bumpy and protracted,” it added
Domestic headline inflation had come off the peak it reached in 2022, benefiting from lower oil prices and some easing in food price inflation over the past year.
Headline inflation had returned to the target band in June 2023 and averaged 6% for the year, down from 6.9% in 2022, it said.
“Nonetheless, headline inflation was forecast to moderate over the course of this year, averaging 5.1% for the year as food and fuel price inflation eased.The slower pace of disinflation reflects a range of issues, including normalising services components and elevated inflation expectations,” the SARB said.
Administered prices continued to exert substantial upward pressure on headline inflation.
The SARB said these regulated, public sector-controlled, prices impeded efforts to bring inflation down and maintain it at the midpoint of the target band; consequently, they also eroded competitiveness.
Electricity and water prices, in particular, had for several years inflated at rates well above the 4.5% midpoint of the inflation target band.
“Efficiency gains in these sectors would be important to ensuring that long-run, cost-reflective prices are achieved soon. Other administered prices, such as education and assessment rates, were influenced by headline inflation outcomes and should be more closely aligned to the target midpoint itself. Reducing headline inflation would bring down administered price inflation, creating a virtuous cycle,” it said.
The report comes as Reserve Bank governor Lesetja Kganyago recently reiterated his call for a lower inflation target, saying that discussions in this regard were underway with National Treasury.
Meanwhile, the SARB said recent inflation data suggested that the path back to central bank targets had slowed and become more uncertain.
“Disinflation has slowed on account of sticky services inflation across a wide range of economies, notwithstanding tighter monetary policy in many jurisdictions,” it said.
Forecasts by most of the major central banks, including the US Federal Reserve and the Bank of England indicated that a return of inflation to target has been pushed further out to 2026.
Looking at growth, the SARB projects both real gross domestic product (GDP) and potential growth to improve to 1.2% this year and to rise to 1.6% by 2026.
In contrast, the International Monetary Fund (IMF) last week lowered South Africa’s growth forecast for 2024 slightly as Africa’s most-industrialised nation’s economic growth stalled, in spite of the global economy remaining remarkably resilient.
In its World Economic Outlook for April published , the IMF said South Africa’s GDP would grow by 0.9% this year and 1.2% next year.
Momentum Investments economist Sanisha Packirisam said at the time the big downgrade to South Africa’s GDP growth in the IMF’s January update was due to increased concerns over South Africa’s logistical woes.
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