South Africa’s inflation data for June 2023 has surpassed expectations, increasing the likelihood of the South African Reserve Bank (SARB) maintaining interest rates this week, according to economists.
On Wednesday, Stats SA released the latest inflation figures for June 2023, revealing a significant year-on-year decrease in headline inflation, which now falls within the SARB’s target range.
In June, inflation stood at 5.4%, down from May’s 6.3%, surpassing market predictions of approximately 5.6%. Core inflation also dropped to 5.0%, lower than the expected 5.1%.
These unexpected inflation numbers have completely altered expectations for the Reserve Bank’s upcoming interest rate adjustment, which was previously considered a “close call” leaning towards another rate hike.
Economists at Nedbank stated that prior to the release of Wednesday’s inflation figures, they anticipated a final 25 basis points rate hike from the SARB on Thursday.
“We believed that the Monetary Policy Committee (MPC) would remain cautious due to uncertainties surrounding load-shedding and the rand,” Nedbank noted.
However, the improved inflation figures have bolstered the case for no further rate hikes.
“Besides the rand’s pullback to below R18 to the US dollar, a faster deceleration in US inflation, and additional evidence of slowing global and domestic demand, the better-than-expected outcome brings inflation back within the target range. This increases the probability that the MPC will leave interest rates unchanged, potentially marking the peak in the rate cycle,” the bank explained.
For Investec, the inflation figures solidified its existing optimistic outlook.
Investec’s chief economist, Annabel Bishop, previously stated that market conditions were already favorable for a hold on interest rates in July. She also mentioned that any downside risks would only result in a minor hike at a later stage.
Following the release of the inflation data, Bishop stated that it is highly likely for interest rates to remain unchanged, indicating the end of the interest rate cycle.
“Looking ahead, South Africa’s forward rate agreement (FRA) curve does not account for an interest rate hike in July, not even a 25 basis points increase. Moreover, no hikes are anticipated for the remainder of the year, aligning with our expectation of no further hikes in the South African interest rate cycle,” Bishop commented.
“The rand’s appreciation against the US dollar, decreasing from R20.00/USD in June to below R18.00/USD this month, reaching R17.80/USD (on Tuesday), is favorable for the SARB’s inflation forecast and, consequently, its monetary policy decisions.”
The Reserve Bank’s MPC is set to announce its decision on Thursday, 20 July.
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