South Africa's inflation trajectory, while showing signs of improvement, remains slower compared to many other countries, driven primarily by cost pressures rather than demand dynamics, notes Ninety One, an asset manager previously part of Investec.
Challenges such as rising electricity supply costs and transport/logistics issues continue to pose upside risks to inflation.
Despite this, recent data suggests a moderation in inflation towards the midpoint of the South African Reserve Bank's (SARB) target range, it said.
According to Ninety One, headline inflation is expected to average 5% in 2024, with core inflation at 4.6%.
While food inflation is projected to decelerate in the first half of the year, concerns persist regarding service sector inflation, particularly in areas such as school fees and medical scheme costs.
Additionally, housing costs, although currently low, are gradually normalising.
The SARB kept its key interest rate unchanged at 8.25% in January, stating that future rate decisions would be based on incoming data.
Annual inflation continued to show signs of moderating towards the midpoint of the SARB’s 3-6% target, falling to 5.1% in December, while core inflation fell to 4.5%.
Peter Kent, a fixed-income portfolio manager at Ninety One, anticipates at least three 25-basis-point interest rate cuts from the SARB in the second half of 2024.
This move would bring the repo rate down from its current 8.25% to 7.5% by year-end, with a possibility of further reduction to 7%.
He shared insights during a recent webinar, as reported by News24. "This is going to be the year of rate cuts...Inflation is improving.
"It's peaked in SA, and rate cuts will be coming ... but we know we have a conservative and credible central bank, so those rate cuts are only going to be coming towards the end of the year."
Kent cautioned that despite the expected relief, interest rates are likely to remain higher compared to the previous cycle.
"There will be some relief, but I wouldn't go [and] buy your dream house just yet" he said, highlighting the nuanced nature of the economic landscape as South Africa navigates through a period of transition.
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