South Africa's inflation rate fell more than expected in July, giving the central bank more room to keep interest rates unchanged as it weighs the impact of oil prices and the Iran war. Consumer prices rose 4.3% from a year earlier, down from 5% in June and below the 4.5% median forecast in a Bloomberg survey. Prices increased 0.2% from June.
Lower fuel and food prices drove much of the slowdown. Petrol prices fell 7.1% during July and diesel dropped 11.7%, pushing annual transport inflation down to 8.9% from 12.7%. Food inflation slowed to 0.6%, its lowest level since 2010, as grain output reduced prices for products including maize meal and bread. Municipal tariff increases were also lower than a year earlier.
Underlying price pressure was less clear. Core inflation, which excludes food and energy, rose to 4.2% from 4.1% in June. Services inflation eased to 5% from 5.2%, while goods inflation fell to 3.4% from 4.8%. The rand gained after the data, trading around 0.5% stronger at 16.18 per dollar.
The South African Reserve Bank kept its policy rate at 7% in July after raising it by 25 basis points in May. Four policymakers backed the hold while 2 supported another increase. The bank is trying to bring inflation toward its 3% target while assessing risks from oil prices, inflation expectations and weak economic growth.
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Its next decision is due on September 23. Forward-rate markets are still pricing about a 70% probability of a 25 basis-point increase, though economists are split. Citigroup sees scope for 1 more increase, while Goldman Sachs expects rates to remain at 7% through the end of 2026 before cuts start in early 2027.
Key Takeaways
The July data reduces pressure on the South African Reserve Bank to raise rates again, but it does not settle the September decision. Inflation at 4.3% is down from June's 5% and much of the drop came from lower fuel and food prices. Both can change. Oil prices remain exposed to the Iran war, while the central bank has warned that another energy shock could push inflation higher. Core inflation also moved up to 4.2%, showing that some price pressure remains outside food and fuel. The bank's 3% inflation target adds another issue. Headline inflation is still above that level, and services inflation remains at 5%.
The May rate increase and July hold show that policymakers are willing to wait for more data rather than respond to each monthly move. Lower inflation also helps consumers because it slows the loss of purchasing power and reduces the need for higher borrowing costs. For investors, the September meeting will depend on whether the July decline continues, what happens to oil prices and whether the rand holds its gains. A sustained fall in inflation could shift the debate from further rate increases toward when the first rate cuts can begin in 2027.
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