South Africa’s targeted consumer inflation was unchanged on a year-on-year basis in August and below market expectations, suggesting price pressures are more benign than feared and leaving the door open for interest rate cuts to boost flagging economic growth.
CPI was steady at 5.3% year-on-year in August compared with July, less than the 5.5% increase economists polled by Reuters predicted last week, Statistics South Africa data showed on Wednesday.
Inflation slowed more than expected to 0.2% month-on-month from 0.9% in July. Economists expected a slowdown to 0.4% month-on-month.
“It’s obvious that demand is still very much on the weak side and because of that businesses can’t easily increase prices,” Citadel economist Salomi Odendaal said.
Rates to stay low for a while
“We also expect pressure from commodity side and food prices and the wage increases that are still above inflation but at least this number shows CPI is not growing faster than we expected. It’s not impossible [the Reserve Bank] would cut rates but we do expect rates to stay low for a while.”
CPI has been steadily creeping closer to the top end of a 3% to 6% target band and for that reason analysts expect the Reserve Bank to keep its repo rate at a three-decade low of 5.5% on Thursday.
The currency and debt markets are however pricing in a rate cut down the line to give the struggling economy a lift.
The Reserve Bank will however have to play a delicate balancing act between accommodative monetary policy to support growth, while keeping an eye on rising inflation pressures stemming partly from the rand’s sharp fall in recent months.
The rand weakened to a near 15-month lows of 7.8220 against the dollar after the inflation data, and was trading at 7.7950 by 8.38am GMT from 7.7805 before the release at 8am GMT. The yield on the 2015 bond fell to 6.84% from 6.89% before beforehand. – Reuters