23 Aug 2024

What next for the MPC?

Tertia Jacobs | Investec Treasury Economist

July CPI unlikely to tempt MPC with larger front loaded rate cuts

Headline inflation decreased to 4.6% from 5.1% in July, the lowest since 2021. This figure was lower than both Bloomberg consensus expectations of 4.8% and ICIB's forecast of 4.9%. Additionally, core inflation, which excludes volatile food and energy prices, was also surprising on the downside, with the increase moderating to 4.3% from 4.5%.

What caused the downside surprise?

We flagged volatility risk associated with electricity tariff increases as influencing the inflation outcome. However, this factor seems to have had a minor impact, as only 5 of the 39 municipalities surveyed did not implement tariff increases in July. Other factors contributing to the lower inflation rate include water tariff increases, subdued food price inflation, and a general slowdown in many prices. These smaller monthly price increases resulted in a 0.2 percentage point reduction in the monthly growth rate, which came in at 0.4% compared to ICIB's forecast of 0.6%.

Water tariffs increased by 8.0% y/y (4.8% m/m) compared to ICIBs forecast of 10.8%. However, more municipalities will be measured in August, whereas we pencilled in the total increase in July.
Food price inflation continued to moderate, rising by 3.9% from 4.1% (ICIB forecast of 4.5%). Most of the food sub-categories showed a lower rate of increase, e.g. dairy and eggs (6.4% vs 7.3%), fruit (2.0% vs 4.1%), vegetables (3.4% vs 4.7%) and sugar and sweets (8.3% from 10.5%), whereas grain products rose to 5.6% (P: 5.2%) and meat price inflation remained subdued at 1.0% (P: 0.8%).
Broad-based moderation in core goods prices, with vehicle price inflation slowing to 4.0% (5%), books to 4.5% (P: 5.6%), package holidays at -2.5%, and hotel accommodation at 11.0% (P:12.8%).

Inflation returning to target earlier, but MPC is unlikely to be tempted with larger than 25bps rate cuts

The outlook for the inflation trajectory has improved following today's inflation outcome. Headline inflation is expected to remain at 4.6% in August before receding to 4.2% in September, well below 4.0% in October and November, and 4.2% in December. ICIB projects Q4 24 to average 3.8% compared to the SARB's July forecast of 4.3%. The SARB's inflation forecast will likely be revised again for the September MPC meeting.

The current real inflation-adjusted policy rate has widened to 3.7%, indicating a highly restrictive monetary policy stance. The implied FRA market continues to price in 25bps of rate cuts at each MPC meeting, totalling 135bps by Q4 25, as the MPC is likely to remain cautious in the context of geopolitical risks and the outcome of the US election. We agree with the sentiment and expect a total of 100bps by end of Q1 25.

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