Easing inflation sparks interest rate cut optimism

South Africa’s annual consumer price inflation (CPI) eased to 3.3% in August from 3.5% in July, Statistics South Africa reported on Wednesday.

The softer-than-expected outcome has raised hopes for an interest rate cut when the South African Reserve Bank’s (Sarb) Monetary Policy Committee (MPC) meets on Thursday.

Headline inflation edged closer to the Sarb’s new 3% target announced in July, while core inflation — which strips out food, non-alcoholic beverages, fuel, and energy prices — rose marginally from 3.0% to 3.1%.

Stats SA said that on a month-to-month basis, CPI declined by 0.1%.

Food prices were a key driver of the slowdown. Overall food inflation fell from 5.5% in July to 5.2% in August, with cereals and vegetables recording notable declines, alongside a moderation in meat prices.

Old Mutual Group chief economist Johann Els said inflation was “lower than expected,” reinforcing the case for easing. 

Investec chief economist Annabel Bishop said the August outcome “was closer to the new 3.0% inflation target,” and that inflationary pressures were virtually absent in the latest data.

Bishop said the only contribution to the CPI on the month came from the residual, a catch-all category for minor inflationary pressure, and at -0.1% month-on-month showing no inflationary pressure on the month.

"Excluding food, non-alcoholic beverages, fuel, and energy prices, the core measure of CPI inflation did rise to 3.1% y/y from 3.0% y/y in July, as underlying inflationary pressures rose slightly," Bishop said.

"The Sarb is still only likely to deliver a 25 basis points cut tomorrow, and not a full 50 basis points move, but the chance will grow for a 25 basis points in November.”

Nedbank economist, Busisi Nkonki, highlighted that while overall food inflation slowed, meat prices rose from 10.3% to 11.3%, their highest since February 2023 due to the foot-and-mouth outbreak.

Nkonki said they were expecting inflation to average 3.3% in 2025 before rising to 4.3% in 2026.

"Given the mild inflation outlook, tomorrow's MPC decision will be a close call. With inflation rising from the Sarb's preferred 3% anchor, our base view is that the MPC will leave interest rates unchanged," Nkonki said.

"However, the rand’s recent rally and the likely further easing in US monetary policy have improved the odds of another rate cut."

Other economists argued more decisively for an immediate cut.

Mark Phillips, head of portfolio management and analytics at PPS Investments, said that inflation was finally on the cosnumers' side and that changes everything.

"For the first time in years, South Africans can look at the numbers and feel a sense of confidence rather than caution," Phillips said.

Professor Waldo Krugell, an economist at North-West University, said there was a good case for another 25 basis points cut on Thursday.

“Inflation is down, and inflation expectations are down. The high commodities prices are keeping the rand strong, and if the US cuts this evening, that will also benefit the rand," Krugell said.

"On the demand side of the economy, the high-frequency indicators show there is virtually no upward pressure on prices. I don't think there is much reason to wait for the final meeting of the year.”

Unisa economist Dr Eliphas Ndou said the ideal conduct of monetary policy involves symmetrically adjusting the repo rate when inflation is below or above the midpoint of the 3-6% target band.

“The recent weak economic growth, together with lower inflation expectations drifting towards the lower part of the 3-6% target band, permits monetary policymakers to lower the repo rate by more than 25 basis points,” Ndou said.

Frank Blackmore, lead economist at KPMG, said that the decline in inflation was influenced by a slight decrease in contributions from food and beverages, as well as information and communication.

“The moderation in inflation from last month’s 3.5% is a positive development. However, inflation is expected to rise in the coming months due to base effects, which may result in no adjustment to the repo rate at tomorrow’s meeting.”

BUSINESS REPORT