Consumer inflation cooled to its lowest level in three years last month, shifting the conversation from whether the Reserve Bank will cut rates to by how much it will reduce them.
The annual inflation rate slowed to 4.6% in July, down from 5.1% in June, according to Stats SA. That’s just 10 basis points above the central bank’s target midpoint.
Inflation fluctuated widely in past decades, averaging 8.64% from 1968 to 2024, peaking at 20.7% in January 1986 and dipping to a record low of 0.2% in January 2004.
The present trend suggests the Bank may soon pivot from its cautious stance to a more accommodative monetary policy, potentially providing much-needed relief for consumers and businesses in a sluggish economy.
The repo rate was last adjusted in May 2023, when the Bank increased the benchmark by 50 basis points (bps) to 8.25%, marking a 15-year high. Since November 2021, borrowing costs rose by 475 bps, putting pressure on indebted South Africans and the broader economy. The Reserve Bank “has definitely run out of excuses to not cut interest rates ... and might have to consider a bigger cut”, independent economist Elize Kruger told Reuters.
North-West University Business School economist Prof Raymond Parsons said cooling inflation signalled that SA was edging closer to achieving low and stable price increases. It would be difficult for the monetary policy committee (MPC) “to justify keeping interest rates unchanged in the face of the much improved inflationary outlook”, he said.
“The table is therefore being clearly set for an initial cut in interest rates when the MPC meets again next month. Although the rate reduction may only be 25 bps at this stage — and no silver bullet for low growth — it would begin a welcome cycle of easing borrowing costs for business and consumers.”
Capital Economics economist David Omojomolo said July’s inflation print strengthened the case for a rate cut. “The larger-than-expected decline in SA’s headline inflation rate to 4.6% year on year in July strengthens the case for the Reserve Bank to start its easing cycle, with a 25 bps cut to 8% at its next meeting in September,” he said.
“Based on this latest print, we think the Bank’s case for cutting interest rates has only strengthened. We noted yesterday [on Tuesday] how underlying measures of inflation suggest that price pressures are contained. July’s inflation figure reinforces that view. Indeed, we now think inflation could fall below 4% by the end of the year,” said Omojomolo.
The annual inflation rate in July, down from 5.1% in June, reflects a broad slowdown in price growth across key categories, including food, transport and housing.
Stats SA reported on Wednesday that food inflation eased to 4.5% from 4.6% in June, with notable price reductions in staples such as maize meal, though bread and cereal prices increased. Agbiz chief economist Wandile Sihlobo said that while there had been a moderation in most food product prices, bread, cereals and meat increased due to supply constraints resulting from the midsummer drought affecting maize production.
Sihlobo warned that those price increases could lead to a slight uptick in food inflation in the coming months. But Sihlobo said that he believed the impact would be tempered by stronger global production of wheat and rice and a firmer rand, which could keep imported food costs in check.
Update: August 21 2024
This story contains additional information throughout.
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