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SA inflation drops to near 9-year low, opening door for rate cut

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By Prinesha Naidoo

(Bloomberg) – South Africa’s annual inflation rate dropped more than forecast to the lowest in almost nine years in October, providing some room for the central bank to ease policy.

Consumer-price growth slowed to 3.7% compared with 4.1% in September, Pretoria-based Statistics South Africa said on Wednesday in a statement on its website. The rand eased.

The latest print marks 31 consecutive months in which inflation has remained within the central bank’s target band of 3% to 6%. The median estimate of 14 economists in a Bloomberg survey was 3.9%.

Key insights

  • The slowdown in inflation may provide the central bank with room to cut its benchmark interest rate on Thursday. In September, the Reserve Bank’s quarterly projection model showed the repurchase rate staying at 6.5% for the rest of the year, but the Monetary Policy Committee at the time also projected inflation will peak at 5.3% in the first quarter, which is well above the preferred 4.5%.
  • While the MPC has faced calls to ease policy to boost an economy that is forecast to expand just 0.5% this year, its modelling shows a 25 basis-point cut will only increase economic growth by 0.1 percentage point a year later. A deteriorating fiscal outlook and political and policy uncertainty limit the central bank’s ability to cut rates, it said in October.
  • Annual core inflation, which excludes the prices of food, non-alcoholic drinks, fuel and electricity, was unchanged at 4%.

Market reaction

  • The rand declined as much as 0.7% against the greenback and was 0.5% weaker at R14.8451 per dollar by 10:23am on Wednesday.
  • Forward-rate agreements starting in one month, used to speculate on borrowing costs, dropped and are now pricing in a 40% chance of a 25 basis-point rate cut.
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