Inflation rate hit 19-month low in June

SOUTH Africa’s inflation rate fell to its lowest in 19 months in June, creating room for the central bank to shift towards looser monetary policy.

Inflation slowed to 5.1% from 5.4% in May, Statistics South Africa said yesterday. That’s the lowest rate since November 2015.

The median of 21 economists’ estimates compiled by Bloomberg was for 5.2%. Prices increased 0.2% in the month.

The central bank’s Monetary Policy Committee (MPC) was to announce its decision on borrowing costs today. It left the benchmark repurchase rate unchanged at 7% since March last year, even as inflation exceeded its target band of 3% to 6% for most of 2017.

Governor Lesetja Kganyago said last month the Reserve Bank had come to the end of its increase cycle, during which it has tightened borrowing costs by 200 basis points in just over two years.

The central bank “has not yet come out in favour of interest-rate cuts, although we do expect an increasingly dovish tone from the second half of 2017”, said Annabel Bishop, chief economist at Investec, before the release of the data in Johannesburg.

The Reserve Bank had “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 will leave the benchmark rate unchanged today. 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 at its May MPC meeting that price growth would stay in the target band till at least the end of 2019.

Food inflation, which accounts for 15.5% of the basket, was unchanged at 7% in June.

The rand regained some ground after losing as much as 11% against the dollar following President Jacob Zuma’s cabinet changes that saw Pravin Gordhan dismissed as finance minister.

That resulted in both Standard & Poor’s Global Ratings and Fitch Ratings downgrading South Africa’s foreign-currency debt to junk.

The public protector told Parliament on June 19 to start the process of changing the constitution to force the Reserve Bank to focus on the “socio-economic well-being of the citizens” rather than on inflation, causing the rand to slide. – Bloomberg