The July inflation rate has provided some support for the view that the SA Reserve Bank will cut the repo rate to 6.25 percent in September, says Capital Economics senior emerging markets economist John Ashbourne. Photo: Bongani Shilubane African News Agency (ANA)
JOHANNESBURG – July's headline inflation rate marked the eighth consecutive month that year-on-year consumer prices were at or below the midpoint of the target range of the South African Reserve Bank (Sarb), providing further motivation for the central bank to cut interest rates next month.

Statistics South Africa said yesterday that inflation in July moderated to 4 percent from 4.5 percent in June, well below the Sarb’s target band of 3 percent to 6 percent.

The stats agency attributed the slowdown in inflation to lower transport prices due to the decline in oil prices in July.

Capital Economics senior emerging markets economist John Ashbourne said July's inflation print had provided some support for the view that policymakers would cut the key repo rate to 6.25 percent in September.

“Most analysts seem to think that the recent weakness of the rand will prompt policymakers to hold their fire. But the Sarb does not tend to react to currency moves, and has cut rates during previous periods of currency weakness,” Ashbourne said.

“With inflation now near the bottom of the target range, we think that there is a brief window for another rate cut. The arguments that justified a rate cut in July are even stronger now; inflation is below the target midpoint and the economy remains very weak.”

The rand strengthened following the release of the inflation print and was bid at R15.2378 against the dollar by 5pm, against R15.33 on Tuesday.

The local unit was, however, significantly weaker from the R13.90 against the dollar it was bid at at the most recent Monetary Policy Committee meeting in July.

Investec economist Kamilla Kaplan said inflation had softended across most advanced and emerging market economies, as the oil price has receded from recent highs and growth in final demand has weakened.

“This has allowed for more accommodative monetary policy with central banks in most countries cutting interest rates,” Kaplan said.

“However, the Sarb is likely to retain a cautious policy stance in view of the recent rand depreciation and persistent vulnerability of a sovereign credit rating downgrade.”

The Sarb cut the benchmark repo rate from 6.75 percent to 6.5 percent in a move that was largely seen as a boost to sluggish demand in the economy that plunged 3.2 percent in the first quarter and has not grown above 2 percent since 2013. It was the first time since March last year that the central bank cut interest rates.

The Sarb’s Quarterly Projection Model is for headline inflation to average 4.4 percent this year.

Lukman Otunuga, a senior research analyst at FXTM, said the latest consumer prices were good news for the Sarb and the economy.

“Repeated signs of inflation moderating during the third and fourth quarter of 2019 should present the Sarb an opportunity to re-join the global easing bandwagon, ultimately stimulating domestic consumption and economic growth,” Otunuga said.

“While the exact timing of the next Sarb rate cut remains uncertain due to the pending rating decision by Moody’s in November, it now remains a matter of when rather than if.”

South Africa’s financial markets are jittery over fears that Moody’s will downgrade the country’s credit rating to junk soon after it warned that the government’s growing debt and financial support for embattled state-owned entities, particularly Eskom, was credit negative.

Moody’s is the only major rating agency that still has the country's sovereign debt above junk. The agency is expected to release its next review in November.