South Africa’s Inflation Outlook Improves Before Key Rate Decision

South Africa’s projected inflation rates for the next two years have decreased, indicating progress in the central bank’s efforts to control inflation ahead of its policy meeting this month.

The average inflation expectations two years out, a crucial factor in the monetary policy committee’s decision-making, dropped from 5.2% to 4.9% in the second quarter, as per a survey by the Bureau for Economic Research (BER).

All segments of society, including analysts, businesspeople, and labor officials, lowered their inflation predictions for the entire three-year period covered by the BER surveys.

The average forecast for inflation in 2024 is 5.3%, 5% in 2025, and 4.9% in 2026. Notably, the five-year inflation forecast dipped below 5% to 4.9% for the first time since the fourth quarter of 2021.

This decline in expectations alleviates concerns raised by the monetary policy committee at its previous meeting, where inflation expectations remained above the 4.5% midpoint of the bank’s target range.

The improved outlook, coupled with easing inflation pressures, may set the stage for a reduction in interest rates later this year.

However, analysts currently predict that the monetary policy committee will maintain the key interest rate at 8.25% for the seventh consecutive meeting on July 18.

Forward-rate agreements are pricing in only a 20% chance of a 25-basis-point rate cut this month, with an 80% probability of a similar reduction by the next meeting in September. The contracts anticipate 37 basis points of cuts by year-end.

Governor Lesetja Kganyago has expressed caution about declaring an end to the monetary policy committee’s fight against inflation. He has consistently stated that the committee won’t cut rates until inflation is firmly at 4.5%.

Despite the cautious stance, survey respondents still project that the prime overdraft rate, which banks use to lend to consumers, will decrease by 50 basis points this year to 11.25%. This indicates an expectation of reduced borrowing costs in the near future.

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