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Lower July inflation expected to assist SARB in keeping rates on ice

Last month, the bank’s monetary policy committee said its implied policy rate path indicated an increase of 25 basis points in the fourth quarter of this year and in each quarter of next year. Picture: Jacques Naude/African News Agency/ANA

Last month, the bank’s monetary policy committee said its implied policy rate path indicated an increase of 25 basis points in the fourth quarter of this year and in each quarter of next year. Picture: Jacques Naude/African News Agency/ANA

Published Aug 19, 2021

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THE SOUTH African Reserve Bank (SARB) is expected to keep interest rates on hold next month, as headline consumer inflation softened for a second month in a row last month.

Data from Statistics South Africa (StatsSA) yesterday showed that the annual rate of the Consumer Price Index edged lower to 4.6 percent year-on-year in July, from 4.9 percent in June.

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This was in line with market expectations and slightly above the 4.5 percent midpoint of the SARB’s inflation target range of 3 to 6 percent.

Core inflation moderated to 3 percent year-on-year, from 3.2 percent in June, mainly because of the increase in water and other services inflation.

Last month, the bank’s monetary policy committee said its implied policy rate path indicated an increase of 25 basis points in the fourth quarter of this year and in each quarter of next year. However, it said better-anchored expectations of future inflation could keep interest rates lower for longer as they are at 3.5 percent.

Casey Delport, an investment analyst at Anchor Capital, said: “Notably, more muted inflation such as what we are witnessing now would help assist the South African Reserve Bank in keeping rates lower for longer if it so desires.”

PPS Investments portfolio manager Luigi Marinus said muted consumer inflation should keep rates low and was good for the bond market.

“An inflation increase near the midpoint of the target band is aligned with the goal of the SARB, and should reduce pressure to increase short-term interest rates,” Marinus said.

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“The latest inflation figure reinforces the view that an overweight domestic bond relative to domestic cash exposure is appropriate for clients seeking an above-inflation return.”

StatsSA said prices slowed mostly for food and non-alcoholic beverages, housing and utilities, transport, and miscellaneous goods and services.

However, administered prices saw an upward swing in inflation.

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StatsSA’s chief director for price statistics, Patrick Kelly, said the main drivers behind inflation last month were alcohol, fuel, medical insurance and municipal service charges.

“Prices for alcoholic beverages rose by 1.7 percent between June and July, the highest increase since March 2019, mainly caused by a sharp 3.8 percent increase in wine prices,” Kelly said. “Fuel prices also increased by 1.7 percent between June and July, bringing the annual rate to 15.2 percent, down from June’s reading of 27.5 percent.”

On a monthly basis, StatsSA said consumer prices inched up 1.1 percent, the most in a year, following a 0.2 percent rise in June.

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First National Bank economist Koketso Mano said they expected annual headline inflation to remain around current levels for the remainder of this year. Mano said consumer prices would be lifted by fuel inflation, but constrained by weak core inflation and slowing food and non-alcoholic beverages inflation.

She said there were risks emanating from the latest developments in Asia, where port and manufacturing activity have been disrupted, but there had not been a significant pass-through to consumers.

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SA Reserve Bank

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