South Africa's CPI inflation falls to 3.3%, indicating potential rate cut tomorrow

South Africa's Consumer Price Index (CPI) inflation has eased to 3.3% year-on-year in August, a slight decline from July’s 3.5%.

This shift has heightened expectations for a potential cut in the repurchase rate (repo rate) at tomorrow’s South African Reserve Bank's (Sarb) Monetary Policy Committee (MPC) meeting.

The recent CPI figures align closely with the newly announced 3.0% inflation target set by the MPC in late July, suggesting that the previous rise to 3.5% was a temporary fluctuation rather than a sustained trend.

Chief economist at Investec, Annabel Bishop said, "The fall in inflation to 3.3% is a positive indicator and is closer to the new 3.0% inflation target set by the MPC at the end of July  July’s inflation spike to 3.5% was a temporary phenomenon and we are now seeing a return to stability." 

This latest CPI figure reflects a decline of 0.1% on a month-to-month basis, signalling a stable inflationary environment.

The only inflationary pressure noted in August came from a residual category that remains largely unchanged.

Notably, the fuel price saw a reduction of 28 cents per litre, contributing minimally to inflation levels.

With regards to food prices, Bishop said that a significant drop was witnessed, as inflation for food and non-alcoholic beverages fell to 5.2% year-on-year from 5.7% in July.

"The moderation in food price inflation is largely attributed to domestic factors," explained Bishop. “Lower processed food prices have emerged due to slumping demand. The rand's performance in 2023 has also been intertwined with shifts in the US dollar, having appreciated by 8.4% since the start of the year, contrasted with the dollar's 10.7% decline," Bishop said.

"As for core inflation, which strips away volatile items such as food and energy, Bishop noted a slight rise to 3.1% year-on-year, up from 3.0% in July. This suggests underlying inflationary pressures are beginning to emerge,” Bishop added. 

While the Sarb is anticipated to deliver a modest 25 basis point rate cut in tomorrow’s meeting, Bishop indicated the possibility of a more significant cut in future sessions.

“The market will likely see a 25 basis point cut tomorrow, but we could see increased chances for a 50 basis point cut come November,” she stated.

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