The slight fall in South African inflation, to 3.1% y/y in August, is likely to be followed by subdued inflation rates over the next few months. Even so, the SARB’s easing cycle has now come to an end.
Softer inflation unlikely to change policymakers’ mind
- The slight fall in South African inflation, to 3.1% y/y in August, is likely to be followed by subdued inflation rates over the next few months. Even so, the SARB’s easing cycle has now come to an end.
- Figures released this morning showed that South African inflation fell a touch, from 3.2% y/y in July to 3.1% y/y in August, slightly above the lower bound of the Reserve Bank’s 3-6% target range. The outturn was in line with our forecast and below the Bloomberg consensus of 3.2% y/y.
- The slight drop in the headline rate was largely driven by softer food price pressures. Food inflation eased from 4.3% y/y in July to 3.9% y/y in August. Housing inflation declined slightly, from 3.2% y/y to 3.1% y/y.
- Other categories showed little change in price pressures. (See Table 1.) Core inflation nudged up from 3.2% y/y in July to 3.3% y/y in August. And the recovery in global oil prices probably pushed transport inflation (which includes petrol price inflation) higher, from 0.0% y/y to 0.2% y/y.
- Looking ahead, we think that the headline inflation rate will hover around 3%, the lower bound of target range. (See Chart 1.) The continued rebound in oil prices will add to price pressures, but this is likely to be offset by weak core inflation. The large fall in output in Q2 and a weak recovery will result in a persistent large output gap, which will keep core price pressures subdued.
- Despite the weakness of inflation, further monetary easing is unlikely. Policymakers at the Reserve Bank left their repo rate unchanged at 3.50% at their meeting earlier this month and the communications were notably less dovish. This closes the door to further monetary easing. We expect no further rate cuts this year or next. That would still result in monetary conditions being exceptionally loose for a long time.
Chart 1: South Africa Consumer Prices & Policy Rate
Sources: Stats SA, SARB, Capital Economics
Table 1: South Africa Consumer Prices
Source: Stats SA (*) Includes non-alcoholic beverages
Virág Fórizs, Africa Economist, firstname.lastname@example.org