ZAR: Inflation paves the way for the SARB – Commerzbank
Source Fxstreet
South Africa continues to move in the right direction. In July, prices rose less than expected - inflation was only up 0.4% (non-seasonally adjusted) month-on-month, bringing the year-on-year rate down from 5.1% to 4.6%. This means that the annual rate is now only slightly above the mid-point of South African Reserve Bank's (SARB) target range of 3-6%, Commerzbank’s FX analyst Volkmar Baur notes.
Falling inflation paves the way for lower policy rates
“It is also encouraging that if we exclude administered prices, inflation is only 4.3%, although the decline here (from 4.4%) is much smaller than the overall decline. Administered prices are usually increased in July, and this year was no exception. Compared with the previous month, they rose by 5.4%, which is slightly less than a year earlier when they rose by 5.9% in July. This therefore contributed to the downside surprise in headline inflation.”
“Nevertheless, the rate of inflation in administered prices remains high, which will keep the inflation rate elevated due to the weight of these prices in the CPI basket of about 17%. The SARB should and will take this into account in its decision. Nevertheless, the dynamics, especially in recent months, look good enough to justify a rate cut by the SARB in September.”
“However, this should not negatively affect the ZAR. Although falling inflation paves the way for lower policy rates, the real interest rate is still quite high at around 3.5% (policy rate minus annual inflation). Moreover, lower interest rates are accompanied by structural improvements that will support the currency in the long run.”
Disclaimer: For information purposes only. Past performance is not indicative of future results.
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