South Africa's central bank is expected to slow the pace of monetary tightening, with this week's decision seen as a close call between 25bp and 50bp rate rise.
Figure 1. South Africa CPI vs. Core CPI Y/Y (%). The shaded region represents the SARB’s target range
Headline CPI inflation remained on a downtrend in December, slowing slightly more than forecast to +7.2% Y/Y. Core inflation unexpectedly eased to +4.9% Y/Y, raising hopes that the worst might be over. A weak auction for South African inflation-linked bonds held days after the release of the latest CPI figures pointed to the perception that we should see disinflationary processes take hold in the coming months. When this is being typed, South Africa’s 10-year breakeven inflation rate sits within touching distance from its 11-month lows printed last week.
Enthusiasm about evidence of cooling price pressures has been somewhat countered by remaining red flags. A BER survey showed that inflation expectations for this year rose to +6.1% Y/Y from +5.9% in the previous quarter, with all social groups revising their forecasts upwards. The poll was taken before South Africa’s energy regulator NERSA approved an 18.65% electricity-tariff hike, the largest in over a decade, which risks pushing inflation expectations even higher. This means that the MPC are under pressure to continue tightening monetary conditions until there is convincing evidence that inflation expectations have been anchored near the mid-point of the target band.