Central Bank Warns Core Inflation Will Remain Sticky, Says Will Revamp Its Projection Model

The South African Reserve Bank says in its biannual Monetary Policy Review that it will revamp its Quarterly Projection Model as several of its features in need of enhancement have come to the fore. The updated model will account for fiscal policy actions in a systematic manner, change the methodology of inflation forecasting, and shorten the inflation forecast horizon in the SARB's Taylor rule.

• In addition, the central bank notes that "core inflation, in particular, is expected to remain sticky over the medium term, peaking at 5.3% in the second quarter of this year, but only settling at the midpoint of the target range in 2025."
• "Domestic food inflation has yet to peak, despite the strong disinflation in global food prices. This indicates that the combined effect of a weaker rand and idiosyncratic domestic factors, such as foot and mouth disease, have dominated food inflation dynamics."
• "Load-shedding is also expected to add materially to headline inflation (0.5 percentage points in 2023) as the costs associated with back-up energy solutions are passed on to consumers, while additional pressures emanate from the sharp increase in electricity prices for the 2023/24 cycle."
• "Risks [to the inflation outlook] are to the upside, however, given the tightening rental housing market, rising medical insurance inflation, elevated inflation expectations and possible second round effects."
• The full Monetary Policy Review can be found under this link.