Inflation in Africa’s largest economy cools for first time in five months

Inflation in South Africa, Africa’s largest economy, eased sharply in July, giving the central bank more room to keep interest rates unchanged as it assesses the impact of volatile global conditions and the war in Iran.

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Consumer prices rose 4.3 percent in the year to July, down from 5 percent in June, according to Statistics South Africa. The reading was below the 4.5 percent median forecast of economists surveyed by Bloomberg and marked the first decline in annual inflation in five months.

Monthly, inflation slowed to 0.2 percent from 0.7 percent in June, helped partly by lower petrol prices as crude oil prices retreated from highs reached during the early stages of the conflict in the Middle East.

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The stronger-than-expected inflation data could reinforce the South African Reserve Bank’s decision to remain patient on interest rates. The central bank left its benchmark rate at 7 percent last month after raising it in May, saying the improving inflation outlook gave policymakers room to assess how price pressures evolve.

Gina Schoeman, South Africa economist at Citigroup, described the latest figures as positive but said the outlook for monetary policy remained dependent on incoming data.

“It’s a good number,” Schoeman said. “Our view is for one more 25 basis point hike in September, determined by data and underlying inflation, or unchanged at higher for longer.”

The Reserve Bank is due to announce its next interest rate decision on September 23, with policymakers expected to pay close attention to underlying inflation and the impact of global energy prices.

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Core inflation, which excludes food and non-alcoholic beverages and is closely watched as a measure of underlying price pressures, edged higher to 4.2 percent in July from 4.1 percent a month earlier. Every month, however, core inflation slowed to 0.5 percent from 0.6 percent

The latest inflation figures also provided some support for the rand, which strengthened 0.5 percent to 16.1874 per dollar by 10:31 a.m. in Johannesburg.
For households and businesses, the moderation in headline inflation offers some relief after price pressures accelerated sharply in June. However, the slight rise in core inflation suggests that the broader decline in consumer prices may not be enough on its own to prompt an immediate shift in the central bank’s policy stance.

The Reserve Bank has maintained that its goal is to return inflation sustainably towards its 3 percent target, leaving policymakers with a delicate balance between supporting economic activity and preventing renewed price pressures.