Good news about interest rates in South Africa

South African inflation expectations fell to an almost four-year low, providing policymakers with another reason to press ahead with their easing cycle.

Average inflation expectations two years ahead — which the central bank’s monetary policy committee uses to inform its decision-making — slipped to 4.5% in the second quarter from 4.7% previously, according to a survey released on Wednesday by the Stellenbosch-based Bureau for Economic Research.

The decline was broad-based among trade unionists, businesspeople, and analysts, the data show.

The MPC prefers to anchor inflation expectations at the 4.5% midpoint of its target band of 3% to 6%, and is in talks with the National Treasury to adjust the goal to 3%.

The South African Reserve Bank will welcome the decline as it endeavours to lower its inflation target, said Andrew Matheny, an economist at Goldman Sachs Group Inc.

“In addition to our US economists’ revised baseline forecast of Fed cuts starting September, we think that these declines in inflation expectations support the case for the SARB to cut rates in September” and this month, he said.

Forward-rate agreements, used to speculate on borrowing costs, are pricing in 16 basis points of cuts at the July 31 meeting, or a 64% chance of a 25 basis-point reduction.

Governor Lesetja Kganyago said Tuesday that South Africa’s inflation rate — which has hovered near or below the floor of the MPC’s target range for eight consecutive months — is creating “opportunistic disinflation” that will help policymakers to anchor price expectations at a lower level.

He also said he is comfortable with the inflation trajectory, although the outlook remains clouded by uncertainty stemming from geopolitical tensions, including US President Donald Trump’s trade war.

These risks warrant the central bank’s current policy stance, which he characterised as still restrictive while being fairly close to a neutral setting that neither heats nor cools the economy.