South Africa’s Stable Inflation Boosts Chances of Rate Cuts

South African inflation rose less than expected in August, increasing the likelihood of interest rate cuts this week and later in the year.

Consumer inflation rose 4.8% year-on-year in August from 4.6% in July, data showed on Wednesday. Economists had forecast 4.9%m moneyweb reported.

All are well within the South African Reserve Bank target range of 3% and 6%, and prices were subdued on a monthly basis, rising just 0.1% from 0.3% in July. The rand responded positively to the numbers, strengthening 0.28% to 13.275 per dollar.

The SARB surprised many economists in July by cutting lending rates for the first time in five years. Now markets and analysts are pricing in as many as two more cuts before year-end.

Forward rate agreements point to a 70% probability of lending rates being cut by 25 basis points when the SARB announces its latest decision on Thursday, and are factoring in a 30% chance of a 50 basis point cut. Markets also suggest there is a high probability of further cuts in November and January.

Halen Bothma, an economist at ETM analytics, said he expected SARB to cut rates by 100 basis points in the current cycle.

Finance Minister Malusi Gigaba’s maiden budget speech in October and the ruling African National Congress leadership election in December would be key factors in determining the bank’s future moves, he said.

Before July’s surprise 0.25% cut, SARB Governor Lesetja Kganyago played down the prospects of cheaper borrowing costs, citing the risks of currency weakness. The rand backtracked this week as bets of another rate hike by the United States central bank resurfaced.

However, the currency weathered the shock axing of Pravin Gordhan as finance minister in March and subsequent credit downgrades to junk, and is around 10% firmer since the beginning of the year.