By Arabile Gumede
Central bank forecast to keep benchmark rate unchanged
Core inflation rate unchanged for three months at 4.8%
South Africa’s inflation rate fell to its lowest in 19 months in June, creating room for the central bank to shift toward looser monetary policy.
Inflation slowed to 5.1 percent from 5.4 percent in May, Pretoria-based Statistics South Africa said Wednesday in a report on its website. That’s the lowest rate since November 2015. The median of 21 economists’ estimates compiled by Bloomberg was for 5.2 percent. Prices increased 0.2 percent in the month.
The central bank’s Monetary Policy Committee will announce its decision on borrowing costs on Thursday. It left the benchmark repurchase rate unchanged at 7 percent since March last year, even as inflation exceeded its 3 percent to 6 percent target band for most of 2017. Governor Lesetja Kganyago said last month the Reserve Bank had come to the end of its increase cycle during which its tightened borrowing costs by 200 basis points in just over two years.
The central bank “has not yet come out in favor of interest-rate cuts, although we do expect an increasingly dovish tone from the second half of 2017,” Annabel Bishop, the chief economist at Investec Ltd., said in an emailed note to clients before the release of the data in Johannesburg. The Reserve Bank has “been following a careful path, which is unlikely to change materially.”
All but two of the 23 economists in a Bloomberg survey forecast the MPC leave the benchmark rate unchanged on Thursday. The five-year breakeven rate, a measure of inflation expectations, has fallen 93 basis points since the start of the year and is close to a five-week low. The central bank forecast in at its May MPC meeting price growth would stay within the target band until at least the end of 2019.
Food inflation, which accounts for 15.5 percent of the basket, was unchanged at 7 percent in June, the statistics agency said.
The rand regained some ground after losing as much as 11 percent against the dollar following President Jacob Zuma’s cabinet changes that saw Pravin Gordhan dismissed as finance minister. That resulted in both S&P Global Ratings and Fitch Ratings Ltd. downgrading South Africa’s foreign-currency debt to junk.
The nation’s anti-graft ombudsman told parliament on June 19 to start the process of changing the constitution to force the Reserve Bank to focus on the “socioeconomic well-being of the citizens” rather than on inflation. Her comments caused the rand to slide as the change was seen by investors as a threat to the lender’s independence.
The currency weakened 0.3 percent to 12.9338 per dollar at 10:14 a.m. in Johannesburg. Yields on rand-denominated government bonds due December 2026 rose four basis points to 8.66 percent.
Core inflation, which excludes the prices food, non-alcoholic beverages, energy and gasoline, was unchanged from the previous two months, at 4.8 percent.