Big shift in interest rate expectations in South Africa
South African annual inflation eased more than expected in July, strengthening the case for the central bank to keep interest rates on hold as it assesses the fallout from the war in Iran.
Economists have shifted to expecting a hold at the Reserve Bank’s September meeting, despite having pencilled in a 25bp hike, in line with the SARB’s own projection modelling.
Consumer prices rose 4.3% compared with 5% in June, Pretoria-based Statistics South Africa said in a statement on its website on Wednesday.
That was slower than the median estimate of 4.5% in a Bloomberg survey of 18 economists. Month-on-month inflation rose 0.2%, compared with 0.7% in June.
“It’s a good number,” said Gina Schoeman, Citigroup Inc.’s South Africa economist. “Our view is for one more 25 basis-point hike in September, determined by data and underlying inflation, or unchanged at higher for longer.”
The rand initially extended gains after the data release, before slackening to trade little changed in the session at 16.2463 per dollar by 12h51 in Johannesburg.
South African 10-year government bonds were a bit firmer, pushing yields down 2 basis points to 8.68%.
The July inflation report coincided with a decrease in South African petrol prices as the cost of crude oil retreated from highs reached during the early stages of the Middle East conflict, although it remained volatile.
The South African Reserve Bank held interest rates at 7% last month, citing an improved outlook for inflation and confidence that price pressures would return to its 3% target.
It raised rates in May and said that the move meant policy could be patient. The SARB will announce its next policy decision on 23 September.
Forward rate agreements, which are used to speculate on borrowing costs, are pricing in a 70% chance that the benchmark rate—currently at 7%—will be raised by 25 basis points at the next MPC.
“We expect the SARB to look past near-term price pressures and instead focus on the disinflation that’s likely to take hold in early 2027, keeping the policy rate at 7.0% through year-end,” said Yvonne Mhango, Africa economist at Bloomberg.
Food inflation sparks hope
Core inflation, which excludes food and energy for a clearer read on underlying price trends, accelerated slightly to 4.2% at an annual rate compared with 4.1% in June, while edging down to 0.5% month-on-month from 0.6%.
Food inflation slowed to 0.6% year-on-year from 1.4% in June, which Wandile Sihlobo, chief economist at the Agricultural Business Chamber, said was the lowest reading since 2010.
Food is one of the largest weighted items that Stats SA tracks to compile the consumer price index.
“We are seeing the benefit of the ample agricultural output of the 2025-26 season in the inflation data, which has continued to decelerate,” Sihlobo said in a research note.
He added that cereal products were experiencing deflation thanks to another year of better grain production.
Annual goods inflation slowed to 3.4% in July from 4.8% the month before, while services inflation was 5% versus 5.2% in June.
“We maintain our forecast for rates on hold from the SARB through year-end,” Goldman Sachs Group Inc. economist Andrew Matheny wrote in a note to clients.
He said this would be “followed by cuts beginning in the first quarter of 2027 in anticipation of a sharp decline in inflation in the second quarter of 2027 on base effects.”
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