Inflation drops to 2021 levels, interest rate cut could be a done deal
Consumer inflation has slowed for a third consecutive month and moved down to 4.4% in August from 4.6% in July. This could be great news for consumers who are expecting an interest rate cut in South Africa on Thursday.
According to Statistics South Africa (StatsSA), this is the lowest inflation print since April 2021 when the rate was also 4.4%.
Stats SA said all transport-related products recorded softer annual rates in August as fuel prices continued to trend downward, declining for a third consecutive month. In terms of food inflation, it had been on a downward trend for about eight months, before it rose to 4.7% in July, from 4.5% previously.
So what does this mean for an interest rate cut?
The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) is expected to announce its decision on the interest rate on Thursday.
The fact that consumer inflation has now dipped below the Reserve Bank's key target of 4.5% means that an interest rate cut may be done deal.
Several analysts, economists and ordinary citizens have been expecting some relief in the form of a 25 basis points (bps) decline on Thursday.
The repo rate is currently at a 14-year high of 8.25% and the prime lending rate is at 11.75%.
Old Mutual’s group chief economist Johann Els said expectations are mounting for an interest rate cut.
Els argued that the SARB would have room to cut rates at both of its remaining meetings for 2024, on September 19 and November.
“I expect interest rates to be cut, perhaps more than expected by the market,” he emphasised.
The economist said the Reserve Bank has successfully brought inflation within its target range, and with global pressures, particularly from the US, starting to ease, the path for a rate cut seems clear.
Absa’s SA macroeconomics team said on Monday that they were expecting a 25bps cut.
"Our view is line with the Thomson Reuters consensus, with 18 of the 21 analysts (including Absa Research) polled last week calling for a 25bps cut while the remaining 3 expecting no change,“ Absa said.
“We believe that the case for a cut has strengthened since the July Monetary Policy Committee when the committee voted 4:2 (with 2 supporting a 25bps cut) in favour of a hold,” the bank added.
Inflation lowered in other areas
StatsSA also noted that lower annual rates were recorded for several product groups, most notably transport, housing, and restaurants and hotels.
In contrast, inflation for food and non-alcoholic beverages (NAB) and alcoholic beverages and tobacco edged higher in August.
“After an eight-month down trend, annual food and NAB inflation picked up in August, rising to 4.7% from 4.5% in July,” StatsSA said.
The research found that most product groups registered higher annual rates, including bread and cereals, meat, fish, milk, eggs and cheese, oils and fats and vegetables.
However, lower rates were recorded for fruit, sugar, sweets and desserts, and both hot and cold beverages.
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