On 19 September, the South African Reserve Bank (SARB) cut interest rates for the first time in four years – lowering the overnight rate of interest from 8.25% to 8.00% in a unanimous vote. The SARB outlined the case for caution when lowering rates and cited risks to inflation via potential offshore trade tariffs which raise the price of imported goods. In this regard, the outcome of the US presidential election in November has the potential to rock the trade tariff boat with Republican candidate Donald Trump proposing a 10% blanket increase in import tariffs and a more punitive 60% applied to Chinese goods, if he were to be elected.
Much of the disinflationary trend of the decade preceding the COVID-19 pandemic was undoubtedly aided by the flood of cheap Chinese goods into international markets, with many countries now complaining that Chinese overproduction and dumping practices make it tough for local industry to compete in a wide range of sectors including car and steel production. As a general observation, the US invents, China builds and the EU regulates. For example, China’s bloated industrial base, fuelled by ultracheap government financing and subsidies, produces more solar panels than the world can absorb. Such loss-making production continues to take place and often requires companies to be bailed out by the Chinese state.
The SARB also touched on global risks to inflation via renewed supply chain disruptions that could result from escalating geopolitical tension and war, as we are seeing in the Middle East at present. When debating local risks to the inflation outlook, the SARB lamented that the stronger rand, lower oil prices and well-behaved SA food price inflation might be partially offset by higher local administered, municipal and electricity prices. Earlier in the year, a leaked document showed that Eskom planned to apply to increase the electricity tariffs it charges municipalities by up to 44% in 2025. Rising electricity and water tariffs naturally bleed into the cost of production and raise the prices of local goods and services.
Despite all these risks, SA’s current inflation prints have been coming down, with a stronger rand allowing August’s CPI print to moderate to 4.4% and the SARB modelling for sub-4% to be reached in the first half of 2025. Given that inflation is by its nature a year-on-year calculation and can almost always be expected to disinflate in the short term when base prices are high, the SARB has stated that they will “look through” a temporary inflation breach on the downside of their target. Although the SARB’s quarterly projection model is just a loose policy guide and is not strictly implemented, the model currently suggests that the appropriate terminal rate of interest at the end of the SA rate-cutting cycle is an overnight rate of 7%, which implies a further 1% worth of rate cuts.