“We were positively surprised given that we were expecting inflation to print at 5.7 per cent. I think the upper end of that forecast range is 5.8 per cent so this is reflective of weak domestic demand,” Rand Merchant Bank Economist Mamello Matikinca told CNBC Africa.
“What has been interesting to see is that over the past 12 months inflation has been relatively well behaved, sitting between 6 per cent and 5 per cent despite the fact that the rand is weakened by about 20 per cent.”
CPI increased 0.3 per cent month on month in June from a 0.3 month on month decrease in May.
Inflation in South Africa is expected to rise, reaching the upper band of the target in August at around 6.3 per cent and 6.4 per cent due to domestic-specific factors. As people demand higher wages, a weak rand and poor economic outlook will contribute to inflationary pressures currently and in the near term.
“We expect interest rates to remain flat for the next two to three years. We believe the South African Reserve Bank (SARB) didn’t indicate that they’ve changed their thinking however if anything, a sustained breach of the inflation target would trigger a move by the SARB but as they indicated, it seems that they have limited room to move in any direction,” Matikinca explained.
While it is expected that inflation will return to the target band in September but the return will depend on the growth outlook for the country. Consumer spending has slowed as petrol prices increase, making it difficult for retailers to pass on higher costs to the consumer.
“I think the SARB governor rightly indicated that the bank is struggling with balancing weak economic growth as well as inflation and it’s going to be very difficult for the bank to move I either direction. They did indicate that room for easing right now has been significantly reduced and they will continue to monitor the inflation outlook,” she said.