South African inflation expectations dip before rate call

A closely watched gauge of South African inflation expectations fell in the third quarter, days before policymakers meet to decide on interest rates.

Average inflation expectations two years ahead dropped to 3.8% in the third quarter from 3.9% previously, according to a survey released on Wednesday by the Stellenbosch-based Bureau for Economic Research.

Read: Sarb stays the course on 3% inflation target, says Old Mutual

The central bank’s monetary policy committee prefers expectations around its 3% inflation goal.

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Read: Kganyago sees room for caution on rate moves

The drop may provide the MPC with room to again hold its benchmark interest rate at 7% on September 23 to support an economy battered by surging energy and fertiliser prices caused by escalating tensions in the Middle East. South African gross domestic product contracted 0.2% in the second quarter, snapping six quarters of growth.

Even so, Amundi SA’s Nicolas Dahan warned another hold could dent the central bank’s credibility after its surprise pause in July.

Read: SA economy seen ending longest growth run in decade

Forward rate agreements, used to speculate on borrowing costs, are pricing in a 52% chance of the benchmark rate being raised by 25 basis points at the MPC meeting, compared with 56% on Tuesday.

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Central bank Governor Lesetja Kganyago said this month the MPC would continue to be measured in its approach to the aftereffects of polyshocks such as higher oil prices and the El Niño weather phenomenon that may reduce rainfall in the coming months, causing food costs to increase.

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Since the last survey three months ago, inflation peaked at 5% in June and moderated to 4.3% the following month.

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