Bigger interest rate cuts on the cards

South African inflation expectations for the next two years fell to their lowest level since 2021, edging closer to the midpoint of the central bank’s target range and boosting the case for policymakers to continue lowering interest rates.

Average inflation expectations two years ahead — which the bank’s monetary policy committee uses to inform its decision-making — fell to 4.6% in the fourth quarter from 4.8% previously, according to a survey released on Thursday by the Stellenbosch-based Bureau for Economic Research.

That’s just above the 4.5% midpoint at which the central bank prefers to anchor inflation expectations.

Data the day before showed South Africa’s annual inflation rate edged up to 2.9% in November from 2.8% the month before. Food price growth, which moderated to a 14-year low, helped tame overall price pressures.

Central Bank Governor Lesetja Kganyago signalled this week that officials would proceed carefully on interest-rate adjustments, given the unpredictable outlook for the global economy.

A combination of factors including higher domestic fuel prices, a weaker rand and concerns about US President-elect Donald Trump’s trade policies are all adding to a murkier inflation outlook. 

The MPC has cut borrowing costs by 50 basis points to 7.75% since starting to ease policy in September.

Policymakers will deliver their next rate decision on 30 January. Forward rate agreements capturing the next interest-rate decision and used to speculate on borrowing costs, are fully pricing in a 25 basis-points reduction and see a slight chance of a bigger move.