Good news about inflation with a big catch for interest rate cuts

South African inflation eased in February, but the Reserve Bank is unlikely to view this as a reason to cut interest rates next week as it weighs the impact of conflict in the Middle East.

Consumer prices rose 3% year-on-year compared with 3.5% a month earlier, Pretoria-based Statistics South Africa said in a statement on Wednesday. The median estimate of 15 economists in a Bloomberg survey was 3.1%.

The South African Reserve Bank targets 3% inflation, but the data probably won’t sway expectations that it will leave the benchmark rate unchanged at 6.75% at the conclusion of its policy meeting on March 26. 

Officials need to assess the fallout from the US-Israel war on Iran, which has sent energy prices surging with sprawling implications for the global economic outlook.

Oil prices have jumped more than 40% since the fighting started on Feb. 28, with Brent crude trading at around $102 a barrel on Wednesday. The rand has meanwhile weakened sharply against the dollar.

Central Bank Governor Lesetja Kganyago on March 5 said that South African inflation was influenced more by currency weakness than oil prices.

Policymakers are also monitoring food inflation, with meat prices already under pressure as the nation battles to contain an outbreak of foot-and-mouth disease in its herds.

Elevated fuel prices will have a knock-on effect on the cost of fertilizer, a key agricultural input, giving officials another reason for caution.

The biggest contributors to inflation were housing and utilities, which rose 4.8% and contributed 1.1 percentage point to the increase, and food and non-alcoholic beverages which rose 3.7%, adding 0.7 percentage point. Headline inflation rose 0.4% in the month, up from 0.2% in January.

Core inflation, which excludes volatile food, fuel and energy prices to grant a picture of underlying price pressures, rose 3% year-on-year. That compared with 3.4% in January. It was up 0.7% in the month versus 0.3%.