South Africa Inflation Rate Rises for First Time in 2017

JOHANNESBURG (Capital Markets in Africa) – South Africa’s inflation rate rose for the first time this year in May after food-price growth quickened from the slowest pace since December 2015.

Consumer-price inflation accelerated to 5.4 percent from 5.3 percent in April, matching the median estimate of 22 economists in a Bloomberg survey and staying within the central bank’s target range for a second month. Prices increased 0.3 percent in the month, Statistics South Africa said in a report released Wednesday in the capital, Pretoria.

Food prices rose 7 percent from a year earlier, snapping four months of slowdowns and accelerating from April’s 6.6 percent, the statistics agency said. Corn prices have plunged 67 percent since reaching a record in 2016, as the country recovers from the worst drought on record and is set for its biggest harvest of the grain since 1981.

“The food-inflation hike is a bit of a surprise,” Kevin Lings, chief economist at Stanlib Asset Management Ltd. in Johannesburg, said by phone. “Food inflation will come down back inside the target in the coming months, and I still believe that inflation overall will fall below 5 percent towards the end of the year.”

The benchmark repurchase rate has remained unchanged since March 2016 as the central bank looked to support growth in an economy that entered the second recession in almost a decade in the first quarter. Inflation is likely to move to the middle of the central bank’s target range of 3 percent to 6 percent because of decelerating food-price growth, Governor Lesetja Kganyago said in a speech in Johannesburg Monday.

“If we can keep inflation lower, anchoring inflation expectations, that should in turn generate a lower rate of interest to support the economy,” Kganyago said.

Junk Rating
S&P Global Ratings and Fitch Ratings Ltd. downgraded the foreign-currency debt of Africa’s most industrialized economy to junk after President Jacob Zumashuffled his cabinet and fired Pravin Gordhan finance minister. The rand regained some ground after losing as much as 11 percent following the move. Moody’s Investors Service cut the nation’s debt to the lowest investment grade this month.

The rand strengthened 0.3 percent to 13.0308 per dollar by 3 p.m. in Johannesburg on Wednesday. Yields on rand-denominated government bonds due December 2026 were little changed at 8.55 percent.

The central bank’s monetary policy committee, which announces its next interest-rate decision in July, has kept its key lending rate at 7 percent for seven meetings.

“We do not expect that this brief increase in headline inflation will be sustained,” John Ashbourne, an economist at Capital Economics in London, said in an emailed note. “We retain out view that inflation will edge down over the coming months, and that the Reserve Bank will cut its key policy rate by 50 basis points by the end of the year.”

The five-year breakeven rate, a measure of inflation expectations, fell to 5.23 percent on June 5, the lowest since February 2015, and was at 5.38 percent Wednesday. The central bank forecasts inflation will remain within the target band until at least the fourth quarter of 2019, it said in its May 25 decision.

Core inflation, which excludes food, non-alcoholic beverages, energy and gasoline, stayed at 4.8 percent, matching the median estimate of 14 economists surveyed by Bloomberg.