By: Johann Els, Chief Economist at Old Mutual Group

As anticipation builds for the release of October's Consumer Price Index (CPI) inflation data and the upcoming MPC, the economic landscape is marked by a noteworthy trend of declining inflation throughout the year. From a relatively stable start, inflation has gradually softened, reaching what is expected to be a year-low in October. Johann Els, Chief Economist at Old Mutual Group, predicts that headline inflation, which stood at 3.8% in September, will drop sharply to around 3% and could potentially dip further to 2.9% or even 2.8%. This anticipated decrease represents a significant turning point, potentially marking the lowest inflation rate observed in the current cycle.

According to Els, the sharp decline expected in October is not solely due to the recent significant petrol price cut of approximately R1.03 per litre but reflects a broader easing of price pressures across various sectors. "The inflationary landscape is showing signs of substantial relaxation, evident not just in transient factors like fuel but across a spectrum of consumer goods, from food to durable goods, all indicating minimal inflationary pressures," Els stated.

With this backdrop, Els strongly advocates for a bold monetary policy move. He suggests that the South African Reserve Bank (SARB) should consider a 50-basis point rate cut in its upcoming decision, a move he believes is justified by the underpinning economic conditions. Els critiques the SARB’s traditionally cautious stance, suggesting that the current environment provides a unique opportunity for a more assertive action. "Given the shortfall in inflation recently and projections that it will remain subdued, a more substantial rate cut would align with the economic signals we are observing," he commented.

Els also expresses concern that the SARB might opt for a more conservative 25-basis point cut, influenced by global economic uncertainties and potential shifts in U.S. policy. He warns that such caution, while prudent, may not fully capitalise on the opportunity to stimulate economic growth at a crucial time. "The Reserve Bank’s approach, while typically geared towards mitigating risk, should also be responsive to clear economic indicators. We have a window to support economic recovery more robustly without jeopardizing our inflation targets," Els elaborated.

In the global context, policy shifts in the United States under President Trump's administration are also playing an important role. The Trump administration's economic policies, particularly around trade and fiscal stimulus, pose a potential risk to global inflation trends, influencing decisions by central banks worldwide. Els notes that the SARB is likely to consider these international policy moves as a factor in their rate decision, suggesting that Trump's policies could prompt a cautious approach to avoid any adverse effects on South Africa's financial stability.

As the decision day approaches, Els’s insights highlight an important moment for South Africa's monetary policy. With inflation at a record low and economic indicators supporting a potential uplift, the coming days could define the trajectory of the country’s economic recovery and growth for the months ahead.