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South African Reserve Bank (SARB) will announce its interest rate decision on 21 July. In mid-May the SARB took a break in the rate hike cycle but openly admitted its dilemma between a weak real economy and high inflation levels. Today's data on consumer prices which showed South African inflation slowed for a third consecutive month in May will give the Reserve Bank room to continue the pause in its interest-rate increase cycle.
The Reserve Bank’s Monetary Policy Committee left the benchmark repurchase rate unchanged at 7 percent at its last meeting as it sought to steer inflation back into its 3 percent to 6 percent target. Data from Statistics South Africa showed on Wednesday South Africa's headline consumer inflation unexpectedly slowed to 6.1 percent year-on-year in May from 6.2 percent in April, beating expectations for CPI to quicken to 6.4 percent year-on-year. Core inflation which excludes the prices of food, non-alcoholic beverages, petrol and energy was unchanged at 5.5 percent year-on-year in May but edged slightly lower to 0.2 percent month-on-month from 0.3 percent.
“The bottom line for the Reserve Bank is that CPI still remains outside the upper 6 percent inflation-target band. While this does give them some breathing room, I think the scope for upside CPI surprises in the second half of the year is still very much there,” said Jeffrey Schultz, an economist at BNP Paribas Securities.
In Q1 South Africa's real GDP contracted by 0.3% qoq. Following the contraction in the economy in the first quarter market expectations for further SARB tightening have been cut back. Since then the situation for the SARB has not improved raising concerns that the economy might stagnate over the year as a whole.
“Given the extent of weakness in economic activity‚ and the focus of the ratings agencies on GDP growth prospects‚ it is probable the SARB may soften its policy stance and refrain from hiking interest rates at its July MPC meeting," said Investec economist Kamilla Kaplan.
USD/ZAR halts downside, trades largely unchanged on the day at 14.7040 as markets await EU referendum on Thursday.
