South Africa Inflation Surprise Raises Prospects of Rate Cut

(Bloomberg) -- South African inflation quickened at a slower pace than expected in December, providing room for policymakers to cut interest rates later this month.

Consumer prices rose 3% from a year earlier, compared with 2.9% in the prior month, Pretoria-based Statistics South Africa said on Wednesday in a statement on its website. That was less than the 3.2% median of 15 economists’ estimates in a Bloomberg survey.

“The smaller-than-expected rise in South Africa’s headline inflation rate” combined with a recent recovery in the rand “supports our view” that the central bank can continue with its easing cycle, said David Omojomolo, Africa economist at Capital Economics. “We expect the repo rate to be cut by 25 basis points to 7.5% this month.”

The rand has gained almost 3% against the dollar since last week, partly buoyed by expectations of stronger growth in Africa’s biggest economy.

The central bank’s monetary policy committee has cut the key rate by 50 basis points since it started its easing cycle in September. Forward rate agreements, used to speculate on borrowing costs, are pricing in a quarter-point cut this year, with a 42% chance of that being announced on Jan. 30.

Still, the central bank will be cautious on easing policy amid concerns about the outlook for global inflation.

What Bloomberg Economics Says...

“Inflation will likely remain near the lower bound of the South African Reserve Bank’s 3%-6% target until mid-2025. It will then tick up to the midpoint of the range through the year end. The rise of global uncertainty will likely keep the rate-cutting cycle short - we expect a 25 basis-point rate cut at the end of January, and then a pause”

Reserve Bank Governor Lesetja Kganyago said this week that policies being enacted by US President Donald Trump may be inflationary and threaten to derail future rate cuts.

“To the extent that the measures taken are inflationary, it could slow down the disinflation process that central banks had so steadfastly worked on since the great inflation of 2022,” Kganyago said. There is a risk that “the reduction in the restrictiveness of monetary policy that we had seen over the past year could then be brought to an abrupt halt,” he said.