Lower inflation in South Africa suggests interest rate cut in September – BNN Bloomberg

(Bloomberg) — Inflation in South Africa has fallen to its lowest level in three years, suggesting monetary policy will ease this quarter.

Consumer prices rose 4.6% year-on-year in July, compared with 5.1% in June, Statistics South Africa said in a statement on its website on Wednesday. That's the lowest since July 2021 and below the 4.8% median estimate of 16 economists in a Bloomberg poll.

The South African Reserve Bank is trying to stabilize inflation and price growth expectations at 4.5%, the midpoint of its target range.

The slowdown could prompt policymakers to cut borrowing costs on September 19. The Monetary Policy Committee left the benchmark interest rate at 8.25 percent at its last meeting, but the decision was not unanimous – four committee members voted for the unchanged stance and two favored a 25 basis point cut.

A stronger rand, supported in part by South Africa's new pro-business coalition government, should reduce inflation risks and justify monetary easing at home. The outlook for the local currency could improve if the Federal Reserve cuts US interest rates.

What Bloomberg Economics says…

“A firmer rand and falling fuel prices are curbing annual inflation in South Africa faster than expected, bringing the first rate cut closer. We now expect annual inflation to reach the midpoint of the central bank's target of 3-6 percent in the third quarter of 2024, rather than the fourth quarter, which could mark the start of the rate-cutting cycle in September.”

— Yvonne Mhango, African economist. Click here to read more.

Forward rate agreements – which are used to speculate on borrowing costs – price in interest rate cuts of around 65 basis points by the end of the year.

The biggest contributor to the inflation slowdown in July was a decline in the goods inflation rate to 4.6% from 5.5%, the South African Bureau of Statistics said in a statement. Core inflation, which excludes food and non-alcoholic beverages, fuel and energy, rose 4.3%, compared with 4.5% in June.

The rand traded slightly weaker after the data was released, losing 0.2 percent to 17.8569 per dollar by 10:41 a.m. in Johannesburg. The yield on rand bonds due 2035 fell six basis points to 10.70 percent.

– With support from S'thembile Cele and Colleen Goko.

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