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South Africa consumer inflation falls to 15-year low

South Sudan NEWS PORTAL (JUBA CITY)

Shoppers stock up on groceries at a Makro store in Johannesburg, South Africa, March 16, 2020. REUTERS/Siphiwe Sibeko

Growth in South Africa’s consumer prices fell to its lowest in more than 15 years as the cost of fuel declined and spending slowed amid the coronavirus lockdown.

At 2.1% year-on-year in May, according to national statistics agency figures published on Wednesday, inflation is also below the lower end of the central bank’s target range, 3% to 6%.

Analysts were divided on whether the declining inflation rate was likely to prompt the central bank to cut interest rates further.

“This number won’t be a surprise to the Monetary Policy Committee (MPC). Inflation will have to surprise in a major way to what they have in their forecasts. What they will be concerned about most is growth,” said Nedbank economist Busisiwe Radebe.

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In May, the South Africa Reserve Bank (SARB) cut rates to a record low 3.75%, to support an economy strangled by a lockdown now its in fourth month. The bank did strike a cautious tone, warning monetary policy alone could not spur economic growth.

“At the May meeting, the feeling was the bank had reached the trough in rate cuts. So they’ll probably hold rates,” Radebe said, adding that a shift in the bank’s 7% GDP contraction would be a key indicator.

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Month-on-month, the consumer price index was at -0.6%. Lower fuel prices linked to a global glut of crude oil saw transport costs fall 8.4% on an annual basis. Other consumer items prices dropped expect for food prices, which increased by 4.4%.

Capital Economics analyst Virág Fórizs expects a 50-basis- point reduction in interest rates at the SARB’s July 23 meeting.

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“Even as price pressures start to pick up, the headline rate will remain very subdued, allowing the Reserve Bank to continue easing. We think that policymakers will cut the repo rate by a further 75bp, to 3.00%, in the coming months.”

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