SA’s inflation and interest rate path in an emerging market context

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المملكة العربية السعودية أخبار أخبار

Key indicators suggest that the Sarb should already have embarked on its own interest rate cutting cycle, yet it remains cautious.

SA’s current inflation target of 3% to 6% was introduced in February 2000. At the time, the annual inflation rate was a very modest 2.3%, but it had averaged 7.3% over the preceding five years, spiking to over 10% at times.

Keeping the inflation rate persistently inside the target range is challenging for a variety of reasons. These include the volatile and relatively weak rand exchange rate; above-inflation wage increases in key economic sectors, including the public sector; poor productivity growth in most industries; sustained large increases in key administered prices ; and a rise in import intensity.

This view is supported by a very welcome easing of food inflation to just over 4% in May 2024 , a decline in fuel prices, and the recent outperformance of the rand exchange rate. They have all cut rates on at least four or more occasions in the past year , and they have all lowered interest rates by between 175 basis points and 575 bps.

Encouragingly, the election outcome received a favourable response from financial markets and SA’s inflation rate is expected to moderate further over the coming months. ADVERTISEMENT: CONTINUE READING BELOW This would allow the Sarb to commence the interest rate cutting cycle in Q3 2024. Consequently, the inflation rate for a wide range of consumer goods and some services has been extremely subdued for many months, averaging below 3% in the first five months of 2024.

The cost of water rose by an average of 7.9% in the first five months of the year, education by 6.1% and medical aid by 10.6%. Large price increases in essential services are not SA’s only longer-term inflation concern. Two other factors need to be highlighted.

 

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