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Price hikes to hit South Africa in next 3 months: economists

South Africans should brace for price increases in July and August as municipal tax hikes hit – however the repo rate is likely to remain flat for much of the year, say economists.

The Consumer Price Index (CPI) for March 2021 showed annual headline inflation increasing slightly to 3.2% in March from 2.9% in February.

This was largely in line with the market’s forecast, with food and non-alcoholic beverages being the biggest reason for the increase, Nedbank economists said in a research note this week.

“For the first quarter of 2021, prices rose by 3.1% compared to 4.4% last year, reflecting a relatively weak economic environment. Still, consumer prices are expected to increase further in the months ahead, with some upward pressure coming from higher fuel prices and electricity tariffs,” the bank said.

Nedbank said that prices will likely be contained by moderate food prices, subdued domestic demand and a stronger rand.

“The bulk of the upward drift will reflect the effect of last year’s extremely low base. On balance, inflation is likely to remain well contained. As a result, we believe the Reserve Bank will keep interest rates unchanged at the current levels for the remainder of this year,” it said.

Electricity, water, and petrol 

April’s CPI will experience further pressure and is likely to see an increase due to a number of factors – including higher fuel prices, said Johann van Tonder, an economist at Momentum Investments.

“In addition, Eskom’s 15.63% increase in electricity tariffs to ‘direct purchasing’ clients entered into force on 1 April,” he said.

“Most households will experience electricity and water tariff increases when municipalities pass it on to them. This increase will show up in July and August’s CPI statistics.”

Van Tonder said that headline CPI should therefore breach the 5% mark in the second quarter of 2021.

“However, as the MPC is forward-looking and as they are more concerned with the second-round effects of increases in fuel and electricity prices, they will monitor core CPI closely going forward,” he said.

“At this stage headline CPI seems to remain close to the MPC’s preferred target of 4,5% over the next two years. We, therefore, do not expect an increase in the repo rate this year.”

Gerhard Kotzé, managing director of the RealNet estate agency group, said that property owners are likely to bare the brunt of the price hikes.

For most households, the cost of both water and electricity is set to rise substantially from July, which is when most local authorities implement their new annual tariff structures, he said.

“Those who receive their electricity supply directly from Eskom will already be experiencing an increase of around 15%, and electricity costs in most municipalities are expected to rise by the same percentage from 1 July, thanks to the recent High Court order formalising an agreement between Eskom and the National Energy Regulator.

“Meanwhile municipal water costs are expected to increase by between 6% and 10% this year, having already risen by far more than the rate of inflation over the past few years, while refuse removal and sanitation cost increases are also expected to be higher than the rate of inflation in most cases.”

Lowest rate in 20 years

The South African Reserve Bank’s Monetary Policy Committee (MPC) is next set to meet to decide on 20 May.

Its next move will be to tighten as it projects inflation will tick up to around the 4.5% mid-point of its target range. Still, the timing of the first hike is uncertain, Bloomberg reported.

At 3.5%, the repo rate is the lowest since it was introduced in 1998, despite its in-house projection model suggesting hikes of 25 basis points in the second and fourth quarters of 2021.

The implied policy rate path of the MPC’s quarterly projection model in March indicated two increases of 25 basis points in the second and fourth quarters of 2021.

However, last week governor Lesetja Kganyago said the central bank is in no rush to take the benchmark back to where it was before the pandemic and that it would likely maintain an accommodative monetary policy stance to support the economy as long as the inflation outlook gives it room to do so.

Forward-rate agreements, used to speculate borrowing costs are pricing in only one 25 basis point increase by year-end. Most economists are less hawkish and see the rate remaining at its record low until the end of 2021.

Read: 6 things that have become more expensive in South Africa over the last year

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