South Africa’s inflation rate falls below central bank’s target ceiling

South Africa’s inflation rate fell below the central bank’s target ceiling for the first time in 14 months, primarily driven by lower food costs. According to Statistics South Africa, consumer prices rose by an annual rate of 5.4% in June, down from 6.3% the previous month.

The result surpassed the median estimate of 22 economists surveyed by Bloomberg, who had expected a 5.5% increase. The central bank, which concludes a policy meeting on Thursday, aims to maintain price growth between 3% and 6% and prefers to anchor inflation expectations at the midpoint of this range.

While a majority of economists polled in a rate-decision survey anticipated the central bank to overlook the easing in price pressures and raise interest rates by a quarter point to 8.5%, the better-than-expected inflation data prompted a revision of these expectations. Forward-rate agreements now indicate a minimal tightening of just five basis points, representing a 20% chance of a 25-basis-point hike, compared to 44% at the beginning of the week.

The positive data had an impact on the financial markets as well. The yield on 2026 government bonds fell by nine basis points to 8.94%, putting it on track for the lowest close in over two months. The South African rand remained relatively stable at 17.8474 per dollar, maintaining its 5.5% gain for the month.

To curb inflation, the South African Reserve Bank has implemented 475 basis points of tightening since November 2021. Governor Lesetja Kganyago and Deputy Governor Kuben Naidoo have previously stated that monetary policy tightening will only cease once the Monetary Policy Committee (MPC) is confident that inflation is returning to the midpoint of the target range.

The forecast for a rate hike has been influenced by inflation expectations, which rose in the second quarter. However, with the recent decline in inflation and the central bank’s commitment to reaching the target midpoint, the outlook for a rate hike has become less certain.

The central bank’s decision on interest rates will be closely watched as it determines the future trajectory of monetary policy and the response to inflationary pressures in South Africa’s economy.

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