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A lower inflation rate may be on the cards for SA

According to the Reserve Bank’s April 2018 Monetary Policy Review, South Africa’s economic performance has improved over the past year.

“Through most of 2017, these gains seemed tentative and impermanent, with the risks skewed towards worse outcomes,” the Review read. “In the new year, however, this progress has come to look more assured.”

The Reserve Bank has warned that although South Africa’s economy has improved, it does not mean that the economy performed well. The economy has not experienced a growth rate of higher than 2% since the year 2013.

After Cyril Ramaphosa replaced Jacob Zuma as the head of the African National Congress, and subsequently as president, the national currency was boosted. This also boosted hopes that structural reform would take place in Africa’s most industrialised economy.

After Ramaphosa changed the cabinet and overhauled the board of the state power utility Eskom, confidence indexes have shown that businesses and investors are now starting to see real reforms.

Last month, Moody’s Investor Service removed the country’s junk credit rating, citing political changes.

According to the Reserve Bank, downgrade concerns may be raised if the nation’s budget deficit proves harder to clear than anticipated. Pressure may also be put on the rand if the country’s current account deficit widens more than expected.

The rand has strengthened by 9% since Ramaphosa was elected ANC leader. The Reserve Bank has predicted the it will continue to increase by 3% to 6% by the end of 2020, stabilizing at approximately 5%.

While the current inflation rate slowed down to 4% in February this year, recent developments in service prices and inflation expectations may engender a permanently lower inflation rate.

Inflation rate projections by the South African Reserve Bank (Source: Monetary Policy Review)

The Reserve Bank assumes that electricity prices will rise to 7.3% in 2019, and further up to 8% in 2020. The central bank will adjust inflation projections only after an announcement from the energy regulator.





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