October 2021 marked a major economic turning point in South Africa, with annual inflation falling significantly to a four-year low. According to Statistics South Africa, the annual CPI rate slowed to 2.8%, representing a sharp deceleration from 3.8% recorded last September. This decline, the lowest since June 2020 (when it was 2.2%), makes an interest rate cut as early as Thursday almost certain.
On a monthly basis, consumer prices fell by 0.1% in October, compared to an increase of 0.1% in September, according to Statistics South Africa. The main reason for the deceleration was the fall in fuel prices, which fell by 5.3% between September and October. The price of 95-octane petrol in the inland areas fell to R21.05 per litre, its lowest level since February 2022.
Annual inflation for food and non-alcoholic beverages also rose to 3.6% in October, after remaining stable between 4.5% and 4.7% for six consecutive months. This is the lowest rate since November 2019. Other positive factors contributing to the decline in inflation were housing and utilities, miscellaneous goods and services (computers, televisions and postal services) as well as alcoholic beverages and tobacco.
This deceleration in inflation was anticipated by the Bureau for Economic Research (BER), which predicted lower inflation for October. Lisette IJssel de Schepper, BER’s chief economist, pointed out that a decline of more than 4% in the CPI should be expected for the rest of the year. She also mentioned that the core inflation rate, excluding fuel and food, is expected to remain stable at around 4.1% in October.
The South African Reserve Bank (Sarb) is expected to welcome this deceleration in inflation at its monetary policy meeting concluding on Thursday. With inflation forecast to be around 4.5% over the medium term, another 25 basis point cut in the policy rate is likely. However, a 50 basis point cut is unlikely to be considered, given the uncertainties surrounding the Trump administration’s potentially inflationary policies and their impact on the global economy.
However, it is important to note that the temporary decline in inflation outside the 3% to 6% target range may not influence the Reserve Bank’s decision. According to Elna Moolman, head of macroeconomic research at Standard Bank, the Sarb generally focuses on inflation over the medium term, when its monetary policy can impact the inflation index. She expects the Sarb to continue to gradually lower interest rates until they are no longer restrictive..
In conclusion, the economic situation in South Africa shows signs of stability and inflation control, strengthening investor and consumer confidence. The prudent monetary policy of the Sarb appears to be in line with current economic data, thus providing encouraging prospects for long-term growth.