Inflation at a five-month low increases the case for a smaller rate hike

South Africa’s inflation slowed to a five-month low in November, supporting a less aggressive rate hike early next year.

The core consumer price index rose 7.4 percent from a year earlier, compared with 7.6 percent in October, Pretoria-based Statistics South Africa said in a statement on Wednesday on your website. The median of 13 estimates in a Bloomberg survey of economists was 7.5%.

The slowdown will be welcomed by the South African Reserve Bank’s monetary policy committee, which was surprised by the higher-than-expected result in October. While the panel officially targets price growth in a range of 3% to 6%, it prefers to anchor expectations near the midpoint of that range.

Headline and core inflation, which excludes food, non-alcoholic beverages, fuel and electricity prices, remain elevated and suggest that price pressures are becoming more widespread. That reinforces the hawkish tone of the central bank’s November MPC statement, when it raised borrowing costs by 75 basis points for a third consecutive meeting.

While other emerging market central banks, including Brazil and Poland, kept key interest rates on hold at their most recent meetings, Reserve Bank Governor Lesetja Kganyago has yet to signal that the MPC may be close to stopping its upward cycle or even slowing the rate of increase. . . Although the benchmark repurchase rate of 7% is higher than the year-end 2025 level that the bank’s quarterly projection model, which the MPC uses as a guide, suggests it should be.

Kganyago dismissed the risk of excessive tightening at the MPC’s press conference in November and affirmed his commitment to taming the “inflation monster”.

Economists and traders expect the central bank to continue raising the benchmark rate next year. Forward rate agreements starting in two months, used to speculate on borrowing costs, show the market predicts the Reserve Bank will begin to cool the pace of rate hikes, with traders pricing in an 80% chance of a 50 basis point increase at the MPC meeting scheduled for January. 26.

The Federal Reserve’s move later on Wednesday will affect expectations for the path of South Africa’s interest rates. While the Reserve Bank is not matching the Fed move-for-move, a slowdown in the pace of US hikes will ease pressure on South African policymakers to tighten the spread that makes local assets attractive to foreign investors.

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