Slowing South Africa Inflation May Delay Start of Rate Hikes

(Bloomberg) -- South Africa’s inflation rate fell to the lowest level in three months in July, giving the central bank more leeway to delay raising interest rates.

The monetary policy committee turned less hawkish on policy normalization at its meeting last month and warned that deadly riots in the eastern KwaZulu-Natal province and the commercial hub of Gauteng would likely slow the economic recovery.

The unrest and the continued impact of the coronavirus pandemic that caused the economy to contract the most in a century last year, has raised uncertainty and weighed on investor confidence. Slowing inflation could allow the central bank to keep providing support after cutting rates to a record low in 2020.

Consumer prices rose 4.6% in July from a year earlier, compared with 4.9% in June, Pretoria-based Statistics South Africa said Wednesday in a statement on its website. That was less than expected and takes it closer to the 4.5% midpoint of the central bank’s target range.

The central bank’s quarterly projection model removed one interest rate hike from its implied benchmark policy rate path for 2021, but still sees a 25-basis-point increase from the current 3.5%.

Investors curbed bets on a rate hike after the data. Forward-rate agreements, used to speculate on borrowing costs, starting in four months fell three basis points, and now signal less than a 100% chance of a quarter-point increase by year-end. Economists in a Bloomberg survey are only predicting policy tightening from the first quarter of next year.

Well Anchored

The MPC sees inflation remaining well-anchored close to the 4.5% target midpoint through 2023, central bank Governor Lesetja Kganyago told lawmakers Wednesday. Fuel, electricity and administered prices present short-term risks to the outlook and the bank may have to raise rates if those materialize, he said last month.

The committee cut the key rate by 300 basis points from January to July last year to buffer the economy against the global fallout from the pandemic and the impact of local lockdown restrictions. Since the start of this year, none of the five MPC members have voted for further easing and the panel has consistently indicated that the next move will be up.

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