SA consumer inflation slows to 4.4% year on year in August, sealing case for domestic rate cut

The Consumer Price Index (CPI) read, released by Statistics South Africa (Stats SA) on Wednesday, will be seen by the Reserve Bank (Sarb) as evidence that its monetary stance over the past 12 to 18 months is now bearing fruit. Monetary policy is crafted with a telescope scanning the economic horizon rather than binoculars focused on a nearby object. 

This was the slowest CPI rate since April 2021 when it also clocked in at 4.4%. 

Pointedly, CPI slowing on an annual basis in August to 4.4% from 4.6% in July means that it has been in the middle of the Sarb’s 3%-to-6% target range for two straight months – which is where it wants it firmly anchored. 

And the prospects of another cut in retail fuel prices in October for the fifth straight month bode well for keeping it in that range for the time being.

“September has seen a 92-cent-per-litre cut in the petrol price, which will exert a significant effect on this month’s inflation outcome, while October is currently in line for a further petrol price drop,” Investec chief economist Annabel Bishop said in a note on the data.  

Still, the Sarb will remain wary – governor Lesetja Kganyago is laser-focused on containing inflation – and the most likely scenario is a 25-basis-point cut that will take its key repo rate to 8.0% and the prime lending rate for consumers to 11.5%. 

For example, food inflation, which has been significantly pruned from an income-devouring 14.4% in March 2023, sprouted higher year-on-year in August to 4.1% from 3.9% in July. That is no cause for panic but the Sarb will keep a hawk eye on this front.

The other big factor that will influence the decision on Thursday by the Sarb’s Monetary Policy Committee (MPC) is the moment that global markets have long been waiting for: an eagerly anticipated cut by the US Fed’s Federal Open Market Committee later on Wednesday. 

Futures markets are now pricing in a 55% chance of a Fed rate cut of 50 basis points. If the reduction is at that scale, the MPC will have room to make a bigger-than-expected cut. 

But if it sticks to the expected 25 basis points in the face of a 50-basis-point trim by the US Fed, it would provide additional support to the rand, and the currency’s strength has been a key driver behind the slowdown in CPI.

South African markets are going to have a lot to digest between now and late Thursday. DM