The SA Reserve Bank’s (Sarb’s) Monetary Policy Committee (MPC) wraps up its bimonthly rates deliberation meeting on Thursday, and the overwhelming expectation among economists is that it will hold its key repo rate steady at 3.5%. The Consumer Price Index (CPI) and retail trade sales data released on Wednesday have all but sealed that case.

First up, the inflation data. They showed CPI gathering pace, reaching 4.4% year on year in April from 3.2% in March. This was its highest read in 14 months, since February of last year, when it hit 4.6% ahead of the Great Lockdown. But this does not, in central bank parlance, point to an “overheating” economy, when demand pressures are huge and full employment is almost reached. That does not even begin to describe South Africa’s economy.

Rather, inflation in April was driven by a 21.4% year-on-year rise in fuel prices, with global oil prices bubbling back from the grave in line with the wider commodities boom. Base effects also played a role as the April number last year was a muted 3.0%.

One area of concern will be food inflation, which leapt to 6.7% year on year from 5.9% in March. Rising food prices take their biggest toll on the poor and the hungry, but expectations have been that food inflation will moderate later in the year because of a bumper domestic maize harvest and other factors. This is an area to watch.

Sarb’s inflation target is 3%-6%, so CPI is now in the middle of that, and expectations are that it will not exceed 6% in 2021. That assumption is based on rates remaining unchanged. 

NKC African Economics economist Pieter du Preez noted in a commentary on the data that real interest rates turned negative in April for the first time in more than five years. Basically, this happens when inflation exceeds the repo rate. It makes borrowing costs quite cheap.

Still, rates have been at these historically low levels since July of last year, but consumers are not taking the bait. Retail trade sales declined by 2.5% in March year on year after rising 2.2% in February, in what at the time looked like a green shoot. That has since withered.

With an unemployment rate north of 40% based on its broadest definition, and the prospect of renewed restrictions on economic activity as the pandemic’s third wave kicks off, not to mention load shedding, the outlook for the retail sector this winter may be bleak. There are some out there who might argue that these factors should make Sarb consider another rate cut, but its concerns are with inflation further down the road. DM/BM