Interest rate pain for South Africa to continue

 ·22 May 2024

South Africa’s inflation rate fell for a second consecutive month as the rise in food prices was more benign.

Consumer prices rose 5.2% in April from a year earlier, compared with 5.3% in the prior month, Pretoria-based Statistics South Africa said Wednesday in a statement on its website.

The median of 18 economists’ estimates in a Bloomberg survey was for the inflation rate to remain unchanged.

The data is unlikely to convince monetary policymakers who meet next week to lower a benchmark rate that’s remained at a 15-year high of 8.25% since May 2023.

Governor Lesetja Kganyago has repeatedly stressed that the central bank will wait for inflation to slow to the midpoint of its 3% to 6% target range before policy is adjusted.

“Despite this better-than-expected outcome, with the South African Reserve Bank increasingly signalling its preference for a 3% point inflation target, we expect no policy rate easing until November,” Razia Khan, chief economist for Standard Chartered Bank, said.

While money markets are assigning no chance of a rate cut at next week’s MPC meeting, traders added to wagers on policy easing over the next 12 months. Forward-rate agreements are pricing in a 92% chance of a 25 basis point cut by January, compared with 80% before the CPI data.

Cooling inflation combined with a rally in the rand ahead of South Africa’s elections next week bodes well for the Reserve Bank’s price growth forecasts.

The rand has strengthened 5.6% over the past month on expectations that the ruling African National Congress may not need to form a coalition with a left-leaning party if it loses its parliamentary majority.

Most opinion polls suggest support for the ANC will dip below 50% for the first time since it took power in the country’s first multiracial vote in 1994.

Food inflation cooled to 4.4% in April, from a prior 4.9%. Bread and cereal prices continued to slow, easing 4.3% from 5%, while egg inflation posted its fifth month of declines, softening 25.1%. Core inflation, which excludes food and energy costs, was 4.6%, compared to 4.9% the prior month.

Read: Relief for consumers in South Africa

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