The small drop in South African inflation, to 3.0% y/y in September, won’t be sufficient to prompt policymakers to resume their easing cycle. Equally, it reinforces the idea that price pressures are very weak, which will allow the Reserve Bank to keep monetary conditions loose for some time.
Rate cuts unlikely to follow slight drop in inflation
- The small drop in South African inflation, to 3.0% y/y in September, won’t be sufficient to prompt policymakers to resume their easing cycle. Equally, it reinforces the idea that price pressures are very weak, which will allow the Reserve Bank to keep monetary conditions loose for some time.
- Figures released this morning showed that South African inflation eased from 3.1% y/y in August to 3.0% y/y in September, the bottom of the Reserve Bank’s 3-6% target range. (See Chart 1.) The outturn was in line with the Bloomberg consensus, albeit a touch softer than our forecast of 3.1% y/y.
- The headline rate ticked down mostly due to a fall in housing inflation, which declined from 3.1% y/y in August to 2.8% y/y in September, shaving 0.1%-pts off the headline inflation reading.
- Price pressures remained broadly unchanged in other categories. (See Table 1.) Food inflation held steady at 3.9% y/y in September. The continued rebound in global oil prices probably pushed up transport inflation (which includes petrol price inflation), from 0.2% y/y in August to 0.3% y/y last month. Core inflation remained at 3.3% y/y.
- We think that the headline rate will stay subdued, at around 3% (the lower bound of the Reserve Bank’s 3-6% target range), in the coming months. Even though we expect that the recovery in oil prices will add to price pressures, we think that this will be offset by weak core inflation. A large output gap and a weak economic recovery will keep core price pressures depressed.
- The Reserve Bank is unlikely to be swayed by low inflation readings to resume its easing cycle. The decision to keep the repo rate unchanged at 3.50% at the September MPC meeting signalled that there will be no further rate cuts. By the same token, the experience from the Global Financial Crisis suggests that the Reserve Bank is unlikely to raise interest rates as quickly as it is priced into markets. We think that monetary conditions will remain loose in the coming years with the repo rate unchanged at least until end-2022.
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