INFLATION DIPS TO 3.3% IN OCTOBER

MBABANE – Eswatini’s headline inflation dropped again in October, bolstering expectations for another interest rate cut by the Central Bank on Friday.

The headline inflation rate in October 2024 (i.e. the annual percentage change in the CPI in October 2024 compared with that of October 2023) for the country dropped to 3.3 per cent.
This inflation rate was 0.3 percentage points lower than the 3.6 per cent observed in September 2024. Headline inflation refers to the change in value of all goods in the basket.
 The higher the rate, the faster the rate at which the prices of the goods increase at a given period. Inflation is measured by the consumer price index (CPI), and at low rates, it keeps the economy healthy.

But when the rate of inflation rises rapidly, it can result in lower purchasing power, higher interest rates, slower economic growth and other negative economic effects. The 3.3 per cent observed in October 2024 is 1.7 percentage points lower than the inflation rate of 5.0 per cent observed in October 2023. In October 2024, the inflation rate for goods was 3.0 per cent and for services, it was 3.8 per cent. The month-on-month inflation rate (i.e. the percentage change in the CPI in October 2024 compared with that of September 2024) is 0.2 per cent.
 This inflation rate is 0.3 percentage points higher than the -0.1 per cent observed in September 2024.

Negative growth

Disinflation came from food and non-alcoholic beverages, which decreased from 10.2 per cent in October 2023 to 3.7 per cent in October 2024. This was due to slower growths observed in sugar, jam, honey, chocolate and confectionery; mineral waters, soft drinks, fruit and vegetable juices; and a negative growth observed in fish and seafood in this category. Furnishing, household equipment and routine household maintenance, also decreased from 0.1 per cent in September 2024 to - 0.6 per cent in October 2024, where negative growths were observed in small tools and miscellaneous accessories; and non-durable household goods, in this category.

When delivering the mid-term budget review report for the year 2024/25, last week, the Minister of Finance, Neal Rijkenberg, stated that headline inflation averaged 4.2 per cent in the first nine months of 2024, moderating from 5.1 per cent in the same period in 2023.Rijkenberg said this decline was mainly driven by a 10.2 percentage point deceleration in inflation for food and non-alcoholic beverages, with notable decreases in bread and cereals, among others.

Conversely, housing and utility prices reflected an uptick of 3.4 percentage points, driven by a 5.7 percentage point increase in actual rental costs. He highlighted that the Central Bank of Eswatini (CBE)’s September 2024 forecast predicts that headline inflation will average 4.2 per cent in 2024. This is attributable to sustained reductions in food prices and moderating global Brent crude oil prices. Inflation is expected to stabilise in the medium-term, with forecasts of 4.9 per cent for 2025 and 4.8 per cent for 2026.

The minister said in view of the moderating inflationary pressures, the global monetary policy stance has been loosened following the tight stance adopted in the past two years.
Hence, in September 2024, the Central Bank of Eswatini reduced the discount rate by 25 basis points from 7.50 per cent in 2023 to 7.25 per cent in the period under review.
Following the same trend, the prime lending rate was also reduced to 10.75 per cent, to stimulate aggregate demand and also provide relief to businesses and consumers.

Pressure

The minister pointed out that in the 2024/25 financial year, total expenditure at half year stood at E13.67 billion compared to E11.86 billion in 2023/24.  The increase is mainly due to inflationary pressure on goods and services, the implementation of the cost-of-living adjustment (CoLA) and interest payments. Meanwhile, the International Monetary Fund (IMF) recently stated that the global battle against inflation has largely been won, even though price pressures persist in some countries. According to the latest World Economic Outlook (WEO) report from the International Monetary Fund (IMF), after peaking at 9.4 per cent year over year in the third quarter of 2022, headline inflation rates are now projected to reach 3.5 per cent by the end of 2025, below the average level of 3.6 per cent between 2000 and 2019.

Moreover, despite a sharp and synchronised tightening of monetary policy around the world, the global economy has remained unusually resilient throughout the disinflationary process, avoiding a global recession. he IMF said growth is projected to hold steady at 3.2 per cent in 2024 and 2025, even though a few countries, especially low-income developing countries, have seen sizable downside growth revisions, often as a result of increased conflicts.

While the global decline in inflation is a major milestone, downside risks are rising and now dominate the outlook: An escalation in regional conflicts, monetary policy remaining tight for too long, a possible resurgence of financial market volatility with adverse effects on sovereign debt markets indicate a deeper growth slowdown in China, and the continued ratcheting up of protectionist policies. According to the global lender, the surge and subsequent decline in global inflation reflects a unique combination of shocks: Broad supply disruptions coupled with strong demand pressures in the wake of the pandemic, followed by sharp spikes in commodity prices caused by the war in Ukraine.

Disruptions

These shocks led to an upward shift and a steepening of the relationship between activity and inflation, the Phillips curve.As supply disruptions eased and monetary policy tightening started to constrain demand, normalisation in labour markets allowed inflation to decline rapidly without a major slowdown in activity. Clearly, much of the disinflation can be attributed to the unwinding of the shocks themselves, followed by improvements in labour supply, often linked to immigration. But monetary policy played an important role too by helping to keep inflation expectations anchored, avoiding deleterious wage-price spirals and a repeat of the disastrous inflation experience of the 1970s.

The return of inflation to near Central Bank targets, paves the way for a much-needed policy triple pivot. The first—on monetary policy—has started. Since June, major Central Banks in advanced economies have started to cut their policy rates, moving their policy stance towards neutral. This will support activity at a time when many advanced economies’ labour markets are showing signs of weakness, with rising unemployment rates. It will also help ward off the downside risks. The change in global monetary conditions is easing the pressure on emerging market economies, with their currencies strengthening against the US Dollar and financial conditions improving.

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