South African inflation in December increased at a slower pace than expected, providing space for policymakers to consider an interest rate reduction later this month. Consumer prices rose 3% year-on-year in December, up from 2.9% in November, according to data released by Statistics South Africa on Wednesday. This was lower than the 3.2% median forecast from 15 economists in a Bloomberg survey.
The lower-than-expected inflation increase, coupled with a recent rebound in the rand, strengthens the view that the South African Reserve Bank (SARB) can continue its easing cycle, according to David Omojomolo, Africa economist at Capital Economics. “We expect the repo rate to be cut by 25 basis points to 7.5% this month,” Omojomolo added.
The rand has appreciated by nearly 3% against the US dollar since last week, bolstered by expectations of stronger growth in South Africa, the continent’s largest economy.
Monetary Policy Outlook: Caution Amid Global Inflation Risks
The SARB’s monetary policy committee has already cut the key interest rate by 25 basis points in each of its last two meetings. Market instruments like forward rate agreements, which speculate on borrowing costs, suggest a 42% probability of a 25-basis-point rate cut on January 30, with analysts anticipating this easing move.
However, the central bank remains cautious about further policy easing due to concerns over global inflationary pressures. SARB Governor Lesetja Kganyago highlighted that policies introduced by US President Donald Trump could add inflationary pressures and disrupt the disinflation trend that central banks have been striving for since the “great inflation” of 2022.
Kganyago expressed concern that inflationary measures could slow the disinflationary process and bring a halt to the monetary policy easing witnessed over the past year, potentially reversing recent efforts.
Inflation Drivers and Economic Outlook
The primary contributors to the December inflation were housing costs, which rose by 4.4%, and miscellaneous goods and services, which increased by 6.6%. Despite this, inflation averaged 4.4% for the year, slightly below the midpoint of the central bank’s target range of 4.5%, which is preferred to anchor inflation expectations.
As the SARB navigates between managing domestic inflation and responding to global economic dynamics, the outlook for interest rate cuts remains balanced, with policy decisions likely to depend on evolving economic indicators and international developments.
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