Slowing inflation gives Sarb more room to pause on rates

Johannesburg - The inflation unexpectedly slowed for a third month in May as food-price growth decelerated, giving the Reserve Bank room to keep interest rates unchanged to support an economy at risk of falling into recession.

The inflation rate dropped to 6.1% from 6.2% a month earlier, Pretoria-based Statistics South Africa said on its website on Wednesday. The median of 21 economist estimates compiled by Bloomberg was for an acceleration to 6.4%.

Prices rose 0.2% in the month. Bond yields and forward-rate agreements, used to speculate on borrowing costs, declined.

The Reserve Bank’s Monetary Policy Committee left the benchmark repurchase rate unchanged at 7% after raising it four times since July as it sought to steer inflation back into its 3% to 6% target, even as it forecast the economy will expand at the slowest pace since a 2009 recession this year.

Gross domestic product contracted 1.2% in the three months through March.

Following the contraction in the economy in the first quarter "market expectations for further Sarb tightening have been cut back,' Razia Khan, head of Africa macro research at Standard Chartered in London, said in an e-mailed note to clients.

"Going forward, expectations of La Nina driving higher-than-average rainfall by the end of the year should help the food-price outlook."

While the rand’s 22% fall against the dollar since the start of last year increased pressure on consumer prices and compounded the effect of the worst drought in more than a century, food inflation slowed to 10.8% in May from 11.3% in April, according to the statistics office.

The central bank will announce its next interest rate decision on July 21 and has said inflation will only return to its target band in the third quarter of next year.

Forward-rate agreements starting in six months are pricing in less than 25 basis points of rate increases for the rest of the year.

The five-year breakeven rate, a measure of bond investors’ price expectations, has slumped 45 basis points this month to 6.89%, the lowest since December.

"The bottom line for the Reserve Bank is that CPI still remains outside the upper 6% inflation-target band," Jeffrey Schultz, an economist at BNP Paribas Securities, said by phone from Johannesburg.

"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."

Core inflation, which excludes food, non-alcoholic beverages, gasoline and electricity costs, was 5.5% in May, the same as the previous month.

The rand was little changed at R14.7070 per dollar as of 11 a.m. in Johannesburg on Wednesday. Yields on rand-denominated government bonds due December 2026 fell six basis points to 8.92%.

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