South Africa’s October inflation reading landed exactly where economists expected, giving the Reserve Bank a fresh policy dilemma as the economy remained in recession.
Statistics South Africa said headline consumer inflation rose 5.1 percent year-on-year in October. A Reuters poll had also pointed to 5.1 percent, helped by lower food prices and only a limited pass-through from higher global oil prices.
The data arrived as Africa’s most industrialised economy struggled with weak growth, increasing pressure on the central bank to consider support for activity. At its previous meeting in September, the bank said it was more worried about the worsening inflation outlook and noted that rates were already accommodative.
That backdrop fed expectations ahead of Thursday’s policy meeting. In a Reuters survey last week, 16 of 26 economists said the Reserve Bank would leave the repo rate at 6.50 percent, while the rest expected a 25 basis-point increase.
Market pricing shifted during the week as traders reassessed the odds of tighter policy. On Tuesday, forward rate markets were implying almost an even chance of a 25 basis-point hike, but by Wednesday that probability had fallen to about 30 percent.
Governor Lesetja Kganyago has said the bank wants inflation closer to 4.5 percent, the midpoint of its 3 to 6 percent target band. That stance has kept a rate increase on the table despite the softer-than-feared October print.
Standard Chartered chief Africa economist Razia Khan said: “Doves will think ‘Aha! So the SARB doesn’t have to hike after all’”. She added: “We however think the reasons for the tightening have more to do with the inflation outlook two years down the line, than the print for last month.”
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