Inflation in South Africa is at its lowest level in more than four years. The South African economy has been experiencing a resurgence of positivity since the rise of power in the Government of National Unity (GNU).

Borrowing rates expected to drop

Inflation in South Africa has fallen to its lowest level in over four years, signaling a further reduction in borrowing rates by the monetary policy committee. Consumer prices increased by 2.8 % in October compared to the previous year, down from 3.8 % the month before.

It is generally expected that the monetary policy committee will reduce the benchmark rate by a quarter point to 7.75 % at its next meeting. However, the governor of the central bank, Lesetja Kganyago, could reiterate that the MPC’s future decisions will depend on data, with emerging new risks of inflation.

Economic growth contributing to inflation decline

The South African economy has seen a resurgence of positivity since the Government of National Unity (GNU), led by Cyril Ramaphosa, began implementing reforms.

In less than six months since the new government took office, Ramaphosa has already launched key reforms to address the economic, energy, and governance challenges South Africa faces. Among the main initiatives are stabilizing the electricity grid through private sector investments and renewable energy projects, as well as modernizing logistics and water infrastructure through the Vulindlela project.

Rating Agency S&P Global Ratings confirmed this optimism by upgrading the nation’s outlook from stable to positive – for the second time since Ramaphosa came to power. This decision suggests a possible upgrade of the country’s credit rating at the next decision by the agency. The rand and South African bonds surged on Monday following the decision.

Consumer price indices favoring a decline in inflation

The decline in fuel prices remains the main factor behind this slowdown. Gasoline and diesel prices fell by 5.3 % between September and October, bringing the annual fuel rate to -19.1 %.

Additionally, prices for some components of the consumer price index (CPI) have moderated, including:

• Restaurants and hotels (5.9 % vs. 7.4 % in September)
• Food and non-alcoholic beverages (3.6 % vs. 4.7 %)
• Alcoholic beverages and tobacco (4.5 % vs. 4.7 %)
• Health (4.8 % vs. 5.1 %)

Every month, consumer prices slightly decreased by 0.1 % in October, marking the first drop in nearly a year, following a 0.1 % increase in September.

Investor confidence in South Africa strengthens

According to Khan, investor confidence in South Africa has strengthened since the formation of the Government of National Unity (GNU) under Ramaphosa’s presidency in June. Moreover, S&P’s ability to highlight potential benefits indicates that rating agencies are rightly focusing on the positive developments ahead.

The rand started the week up, outperforming its emerging market peers. The South African currency reached its highest level in a week after S&P adjusted its outlook for the country’s debt. The agency also reaffirmed South Africa’s long-term foreign currency rating, which is three notches below the investment grade.

An upward revision of the economic outlook suggests a one-in-three chance of an upgrade in the next 12 months, as noted by S&P. South Africa last received this positive outlook in May 2022, only to have it downgraded to stable in 2023.