South Africa March Inflation Slows, Easing Pressure on SARB

  • Inflation rate fell to 6.3%, first decline in seven months
  • Core inflation slows to 5.4% in March from 5.7% before

South African inflation slowed for the first time in seven months in March and the measure stripping out fuel and food costs rose less than forecast, giving the Reserve Bank room to pause its interest-rate hiking cycle.

The inflation rate declined to 6.3 percent from 7 percent a month earlier, Pretoria-based Statistics South Africa said on its website on Wednesday. The median of 22 economist estimates compiled by Bloomberg was 6.4 percent. Prices rose 0.8 percent in the month. Core inflation, which excludes food, non-alcoholic beverages, gasoline and electricity costs, slowed to 5.4 percent in March, the lowest rate since December and less than the 5.8 percent projected.

The worst drought in more than a century has driven up food costs and added to pressure on consumer prices caused by the rand’s 25 percent fall against the dollar last year. While the Reserve Bank’s Monetary Policy Committee increased its benchmark repurchase rate four times since July to 7 percent and has said inflation will only return to its 3 percent to 6 percent target range in the final quarter of 2017, slower price growth could give the MPC a chance to pause its hiking cycle.

“They have done a whole percentage point in three meetings and that is quite significant given the dismal state of the economy,” Elize Kruger, an economist at KADD Capital, said by phone from Johannesburg on Wednesday. “I think there could be enough reasons for them to just pause.”

Slow Growth

The central bank, which will announce its next interest rate decision on May 19, has cut its economic growth forecast for South Africa to 0.8 percent, which would be the slowest pace since the 2009 recession. The nation risks losing its investment-grade credit rating with Standard & Poor’s due to review its BBB- assessment, which is one level above junk, in June.

Forward-rate agreements starting in eight months, used to lock in borrowing costs, show investors have pared expectations and are now pricing in 41 basis points of rate increases by the end of the year. That compares with 65 basis points two weeks ago. The yield on the benchmark 10-year bond dropped as much as five basis points after the data was released. The rand strengthened 0.1 percent to 14.2694 per dollar at 11:15 a.m. in Johannesburg, taking its gain for the year to 8.5 percent.

University tuition fees that stayed unchanged this year after a series of student demonstrations in 2015 contributed to the lower core inflation rate, Kruger said. While a 5.6 percent fall in the gasoline price in March contributed to slower inflation, fuel costs rose by 7.5 percent this month.

“This is just the ins and outs of base effects,” Gina Schoeman, an economist at Citigroup Inc. in Johannesburg, said by phone. “We have no doubt inflation is going up from here, but we could end up with a slightly lower inflation profile.”

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