South Africa’s Inflation Surprise – Increased Chances of an Interest Rate Cut

South Africa’s inflation rate rose modestly in December, falling below economists’ expectations and creating space for the central bank to consider further interest rate cuts. With inflation remaining near the lower end of the South African Reserve Bank’s (SARB) 3%-6% target range, policymakers may have room to continue easing monetary policy, which could stimulate economic growth.

Inflation Trends

In December, consumer prices increased 3% year-on-year, a slight rise from 2.9% in November. However, this was below the 3.2% median forecast from a Bloomberg survey of 15 economists. The slower-than-expected pace of inflation signals a stable pricing environment, bolstered by the strengthening of the rand.

Inflation Contributors

• Housing costs: Increased by 4.4%, driving a significant portion of the inflation rate.
• Miscellaneous goods and services: Rose by 6.6%, marking another major contributor to December’s inflation.

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With average inflation for 2024 at 4.4%, slightly below the SARB’s 4.5% midpoint target, the central bank appears to have achieved its goal of anchoring inflation expectations.

Central Bank’s Next Steps

The SARB has already cut its key repo rate by 50 basis points since initiating its easing cycle in September. Market indicators, such as forward rate agreements, suggest a 42% chance of a 25 basis-point cut being announced on January 30, which would bring the repo rate to 7.5%.

Economists like David Omojomolo from Capital Economics believe the rand’s recovery and subdued inflation provide the SARB with the flexibility to continue rate cuts. “We expect the repo rate to be cut by 25 basis points to 7.5% this month,” Omojomolo said.

Outlook on Inflation

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Bloomberg Economics forecasts that inflation will hover near the lower end of the SARB’s target range until mid-2025. After that, inflation is expected to rise gradually toward the midpoint of the target. However, global uncertainties, including potential inflationary pressures from U.S. policies, could limit the central bank’s ability to extend the rate-cutting cycle.

Reserve Bank Governor Lesetja Kganyago warned about the potential impact of inflationary measures from global markets. “The reduction in the restrictiveness of monetary policy that we had seen over the past year could then be brought to an abrupt halt,” Kganyago said, signaling caution over future monetary easing.

The Rand’s Strength

The rand has gained nearly 3% against the U.S. dollar in recent weeks, supported by optimism about stronger growth in South Africa. A stronger currency can help curb imported inflation, providing additional support for SARB’s efforts to cut interest rates without risking price instability.

Inflation Revisions

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Statistics South Africa (Stats SA) announced that revisions to the inflation calculation methodology will be reflected in future releases. Changes include:

• Updates to the consumer price index basket to better reflect current consumption patterns.
• Adjustments to the classification of goods and services.
• New weightings based on the latest income and expenditure survey.

These updates will be based on a new reference period of December 2024 and aim to ensure inflation measurements accurately capture shifts in the economy.

What It Means

For consumers, slower inflation offers a reprieve from rising costs, particularly in essential goods and services. For policymakers, the subdued inflation environment provides an opportunity to stimulate the economy through rate cuts. However, caution remains necessary due to uncertainties in global markets that could reverse these gains.

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