South African improve their inflation outlook

South African inflation expectations for the next two years have fallen to their lowest level since 2021, moving closer to the midpoint of the central bank's target range. This trend is seen as a positive development, supporting the case for policymakers to continue lowering interest rates. Nicolaas van der Wath, Senior Economist at the Bureau for Economic Research, provided valuable insights into the current economic landscape in a recent interview with CNBC Africa. The quarterly survey conducted among trade unions, economists, business people, and households revealed a decline in inflation expectations across all social groups. Interestingly, analysts showcased the lowest expectations, followed by trade unionists and business people. However, overall, all groups now had expectations hovering around the midpoint of the reserve bank's target range. Van der Wath highlighted a significant shift in trade union expectations regarding wage increases, with a more realistic outlook of less than five percent growth anticipated for the next year. This adjustment could potentially mitigate labor friction and subsequent inflationary pressures, positively impacting the overall inflation outlook. The survey also delved into the participants' views on current economic conditions and future growth prospects. The consensus was generally pessimistic, with expectations of marginal growth rates below desirable levels. For the current year, a mere one percent growth is expected, aligning closely with existing data from StatsSA and the BEI's forecasts. Looking ahead to the next year, a modest 1.5 percent growth projection indicates ongoing challenges that hinder robust economic expansion. The subdued growth forecasts resonate with the need for the national government to reassess its budget and expenditure plans to maintain sustainable debt-to-GDP ratios. The slow pace of reforms and persistent infrastructure challenges in sectors such as transportation, energy, and water supply contribute to the prevailing pessimism among respondents. The gradual nature of addressing these fundamental issues underscores the realistic expectations harbored by businesses, trade unions, and analysts. On the subject of wage increases, participants anticipate moderate growth, signaling a positive outlook for inflation control. With a forecast of less than five percent salary growth in the coming year, there is potential for sustained subdued inflation, allowing leeway for the reserve bank to consider further interest rate cuts. Lower interest rates would alleviate financial burdens on companies and households, stimulating investment in key sectors and propelling economic growth. As the reserve bank gears up to announce its next interest rate decision at the end of January, the current inflation expectations at the midpoint of the target range bode well for potential rate cuts. With reduced inflationary pressure on the horizon, policymakers are likely to weigh this factor carefully in their decision-making process, paving the way for future monetary easing measures.