MPC sticks to its guns and discounts 3% inflation target

DESPITE the lowering of the US Federal bank rate by 0.25% last Wednesday and the sudden decrease in South Africa's inflation rate in August to 3.3%, from 3.6% in July, the Monetary Policy Committee (MPC) still decided to keep the repo rate unchanged.

- CHRIS HARMSE

The main reasons for the sudden decrease in the August inflation rate were that annual fuel prices decreased by -4.7% and decreased by -0.8% for the month alone.

The contribution of the total transport sector to the annual inflation rate also came down by -0.2%. Food prices increased at a lower rate of 5.2% against the annual increase of 7.2% in July. Month on month there was a -01% decrease in food and non-acholic prices and it contributed 0.9% to the total inflation rate of 3.3% against the 1.0% the previous month.

In its press release on Thursday, the MPC declared that: “Our inflation projections also have upward adjustments to food and services prices, partly offset by a stronger exchange rate assumption. Overall, we expect headline inflation to average 3.4% this year, and 3.6% next year, before reverting to 3% during 2027.”

The MPC, therefore, believes that last month's lower-than-expected food price inflation may only be a once off. Also given the higher electricity price inflation, of 8% rather than 6%, given the recent pricing correction by Nersa, will keep pressure on the headline inflation to remain higher than the MPC’s “unofficial” new target of 3.0%. Therefore, the decision not to lower the repo rate.