South African inflation dropped to 6.7% y/y in July, down from June’s 6.9% y/y, slightly higher than the consensus expectation of 6.6% y/y and our forecast of 6.2% y/y
Details
Statistics South Africa published inflation numbers for July today. July’s inflation dropped to 6.7% y/y – slightly higher than the consensus expectation of 6.6% y/y and our forecast of 6.2% y/y. The main culprit was higher prices in housing and utilities, which in turn were the result of higher prices for electricity, water and other services. Higher petrol prices also contributed to elevated inflation. Moderation in July’s annual inflation is attributable to lower food prices. Today’s number means that inflation remains above the South African central bank’s (SARB) inflation target range of 3%-6%.
Assessment & Outlook
Inflation continues to moderate, but only very slowly. Even though inflation is driven mostly by administrative price increases, it continues to be above the SARB’s inflation target range. This month the South African central bank surprised us with its decision to cut interest rates by 50bp – earlier than we had expected. Looking ahead, our base scenario is that the key policy rate at 7.00% is the bottom of the easing cycle. However, downside risks to our view exist, especially if inflation surprises on the downside in the coming months, if there are negative surprises in retail sales and last but not least, if the new SARB governor Gill Marcus beginning her term in November advocates a more dovish stance.
