Good news about inflation and interest rates despite record-high petrol prices

A closely watched gauge of South African inflation expectations fell in the third quarter, days before policymakers meet to decide on interest rates.

Average inflation expectations two years ahead dropped to 3.8% in the third quarter from 3.9% previously, according to a survey released on Wednesday by the Stellenbosch-based Bureau for Economic Research.

The central bank’s monetary policy committee prefers expectations around its 3% inflation goal. 

The drop may give the MPC room to hold its benchmark interest rate at 7% again on 23 September to support an economy battered by surging energy and fertiliser prices driven by escalating tensions in the Middle East.

South Africa’s gross domestic product contracted 0.2% in the second quarter, snapping a six-quarter run of growth.  

Even so, Amundi’s Nicolas Dahan warned another hold could dent the central bank’s credibility after its surprise pause in July.

Forward rate agreements, used to speculate on borrowing costs, are pricing in a 52% chance of the benchmark rate being raised by 25 basis points at the MPC meeting, compared with 56% on Tuesday. 

Central bank Governor Lesetja Kganyago said this month that the MPC would remain measured in its approach to the aftereffects of policy shocks.

These shocks include higher oil prices and the El Niño weather phenomenon, which may reduce rainfall in the coming months, thereby increasing food costs.

Since the last survey three months ago, inflation peaked at 5% in June and moderated to 4.3% the following month.