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SA Inflation: Soft Enough?

Inflation in South Africa continued its easing path in June with a 5.1% y/y rise down from the 5.4% print in May and below the market consensus expectation of 5.2%. This was the lowest print since November 2015 and reflected slowing household costs for transport, clothing and footwear, and restaurants and hotels. Core inflation, which excludes cost of food, non-alcoholic beverages, petrol and energy was steady at 4.8%.

With headline inflation comfortably within the target of 3%-6% in April and the economy in recession, tomorrow's SARB policy announcement will certainly be preceded by a serious discussion of a policy rate cut from the current 7.0% given the somewhat unexpected tumble into recession during Q1 and a slew of indicators which suggests that the downturn will linger into Q2.

Although the Bank's last forecast envisaged medium-term price momentum as being too close to the upper bound to warrant a trim, today's release should dampen such concerns. Moreover, the underlying risks of rising rand volatility, possible downward moves from ratings agencies, upcoming electricity hikes and domestic political uncertainty may also fade against the pressure from some quarters that the SARB's monetary policy mandate be amended to focus more on growth. There is an even chance of a rate 25bps cut to 6.75% although we do not expect a unanimous decision.

Retail sales in South Africa during May also beat expectations with a 1.7% y/y rise after a upwardly revised 2% climb in April. Annual sales have now risen for three months in a row. On a monthly basis, retail sales rose for the fourth consecutive month in May with a 0.9% advance.

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