Big interest rate cut on the cards next month

South Africa’s annual inflation rate fell below 4% for the first time in more than three years, bolstering the case for policymakers to continue cutting rates.  

Consumer prices rose 3.8% in September, compared with 4.4% in the prior month, Pretoria-based Statistics South Africa said Wednesday in a statement on its website.

That matched the median of 15 economists’ estimates in a Bloomberg survey.

The drop in the rate to the lower end of the central bank’s 3% to 6% target range, along with expectations that it may fall further, will likely persuade officials to cut the policy benchmark for the second time in a row on November 21.

A favourable food harvest and soft fuel prices are factors that are expected to help inflation slow down further. 

Forward rate agreements, used to speculate on borrowing costs, are pricing in a 92% chance of a 25-basis-point cut in November. 

The currency erased a gain to trade little changed at 17.5709 per dollar as of 10:18 a.m. in Johannesburg. Yields on rand-denominated bonds due 2035 held around 10.63% after rising about 60 basis points since the beginning of October.

The central bank’s biannual monetary policy review, published last week, said that while its policy stance is moderately restrictive and the disinflation process is on track, there’s lingering uncertainty about the outlook that requires the authorities to proceed with caution.

The main driver of the slowdown was softer transport inflation, helped by lower fuel prices. The category entered deflationary territory for the first time in 13 months, with the annual rate falling to -1.1% in September from 2.8% in August, the statistics agency said. Annual food & non-alcoholic beverages inflation was 4.7%, unchanged from August.

“We believe there is room for the SARB to cut a little bit more aggressively,” said Patrick Buthelezi, an economist at Sanlam Investments, who forecasts inflation to slow to 3% by the time of the MPC’s final meeting of the year next month.

While South Africa’s central bank has more space to manoeuvre, it has “made it quite clear that if perhaps the Fed is the hare in the race, the SARB is the tortoise,” Frank Blackmore, lead economist at KPMG in South Africa, said.

“I think in hindsight, given the values we’re seeing now of inflation, we could have followed the Fed with a 50-basis point reduction and then taken it more cautiously from November onwards.”