South African consumer inflation decelerated more than expected in July, signaling a possible decision for the monetary policy committee to keep interest rates unchanged next month. According to Statistics South Africa, annual prices slowed to 4.7 per cent in July, led by decreases in food and non-alcoholic beverages, as well as housing and utilities, from 5.4 per cent the month before. Month-on-month prices saw a 0.9 per cent increase.
Carmen Nel, Head of Multi-Asset Strategy at Terrabinth Capital, provided insights on the surprising inflation numbers. She mentioned that not all the municipalities' increases were captured in the July survey, hinting at a potential spillover effect in August. Nel expressed hope that these numbers reflected a lack of tariff hikes by municipalities rather than undercounting. This slowdown in inflation supports the Reserve Bank's decision to maintain current interest rates and indicates no immediate pressure for a hike.
The upcoming monetary policy meeting scheduled for September 21st will be influenced by this data. Nel highlighted that forward rate agreements are pricing in a stable policy rate over the next year, with inflation expected to rise above 5% due to increases in petrol and diesel prices. Despite this, core inflation is expected to remain steady, driven by weak domestic demand conditions.
The discussion now revolves around the possibility of rate cuts in the future. While peak inflation levels have passed, caution is advised as the July CPI data benefited from a high base last year. The focus is on sustaining a decline in inflation towards 4.5% or below before considering rate cuts. However, the timing of these cuts will depend on various factors, including global central bank actions.
Terrabinth Capital projects a potential rate cut in the second quarter of next year, with a more conservative approach from the Reserve Bank. The ability to implement significant cuts hinges on decisions made by developed market central banks. With Europe still grappling with inflation issues and the Fed signaling a pause in aggressive easing, the South African easing cycle may not lead to a substantial boost in domestic growth.
In conclusion, the recent slowdown in inflation has set the stage for a possible hold on interest rates by the monetary policy committee. While discussions about future rate cuts are underway, the timing and extent of these cuts will be influenced by both domestic and global economic conditions. South Africa remains cautiously positioned amidst uncertainties in the global market, with a focus on maintaining stability and fostering sustainable economic growth.