Falling inflation gives South African Reserve Bank room to pause its rate hike cycle

In mid-May the South African Reserve Bank (SARB) took a break in the rate hike cycle but openly admitted its dilemma between a weak real economy and high inflation levels. Since then the situation for the SARB has not improved. In Q1 real GDP contracted by 0.3% qoq, which leads to concerns that the economy might not do more than stagnate over the year as a whole.

Data from Statistics South Africa showed on Wednesday South Africa's headline consumer inflation unexpectedly slowed to 6.1 percent year-on-year in May from 6.2 percent in April, beating expectations for CPI to quicken to 6.4 percent year-on-year. Core inflation which excludes the prices of food, non-alcoholic beverages, petrol and energy was unchanged at 5.5 percent year-on-year in May but edged slightly lower to 0.2 percent month-on-month from 0.3 percent.

The central bank will announce its interest rate decision on 21 July and today's data on consumer prices which showed South African inflation slowed for a third consecutive month in May will give the Reserve Bank room to continue the pause in its interest-rate increase cycle.

Forward-rate agreements starting in two months, used to speculate on borrowing costs, fell three basis points to 7,37% from minutes before the announcement. USD/ZAR halts downside, trades largely unchanged on the day at 14.7040 as markets await EU referendum on Thursday.