South African Inflation Slows, Providing Leeway for Rate Cuts
South Africa's inflation rate decelerated less than expected in December, creating space for possible policy rate reductions later this month.
Key Findings:
* Consumer prices rose 3% year-on-year in December, surpassing the previous month's 2.9%.
* However, this increase was below the median estimate of 3.2% among economists surveyed by Bloomberg.
Expert Insights:
"The smaller-than-anticipated inflation increase, coupled with the recent rand recovery, reinforces our view that the central bank has room to continue its easing cycle," said David Omojomolo, Africa economist at Capital Economics. He anticipates a 25 basis point cut in the repo rate this month, lowering it to 7.5%.
Market Reactions:
The rand has strengthened by nearly 3% against the US dollar since last week, partially due to optimism about economic growth in Africa's largest economy.
Forward rate agreements predict a quarter-point reduction this year, with a 42% likelihood of this occurring on January 30th.
Central Bank Considerations:
The central bank remains cautious about excessive policy easing due to concerns about the global inflation outlook. Governor Lesetja Kganyago has expressed worries that policies implemented by US President Donald Trump may contribute to inflation and jeopardize future rate cuts.
Inflation Drivers:
Housing costs and miscellaneous goods and services were the primary contributors to inflation in December, rising by 4.4% and 6.6%, respectively.
Annual Average:
Inflation averaged 4.4% in 2024, slightly below the central bank's target range midpoint of 4.5%. This indicates that inflation expectations remain anchored within the desired range.