South African’s inflation slowed to the lowest level in two years last month, beating expectations and providing room for the central bank to continue keeping interest rates on hold.

The headline consumer-price index rose 4.7% in July from a year earlier, compared with 5.4% in June, Pretoria-based Statistics South Africa said Wednesday in a statement on its website. The median of 15 economists’ estimates in a Bloomberg survey was 4.9%.

Forward-rate agreements starting in a month — used to speculate on borrowing costs — show traders are pricing in an 10% chance of a quarter-point increase in the repurchase rate on Sept. 21 when the South African Reserve Bank (SARB) gives its next decision. That was down from slightly more than 20% prior to the data release.

“This reinforces our view that the SARB will be on hold for the rest of 2023, even though the July print was driven in part by a favourable base effect,” Razia Khan, chief economist Africa and Middle East at Standard Chartered Bank, said in an email.

Government bonds declined, with yields on 10-year notes trading 15 basis points lower from closing levels to 11.79% by 10:30 a.m. in Johannesburg. The rand extended its gains to lead emerging-markets after the data. The currency traded 0.6% stronger at 18.695 per dollar.

On Target

The central bank targets price growth at 3% to 6% and prefers to anchor inflation expectations at the midpoint of the range. Most economists polled in a Bloomberg rate-decision survey ahead of the data release predict the monetary policy committee will hold borrowing costs for the rest of the year.

The MPC last month paused its longest phase of monetary tightening since 2006, leaving its policy benchmark at 8.25%. It raised rates in its 10 prior meetings, to bring cumulative increases to 475 basis points since November 2021.

Deputy Governor Fundi Tshazibana said in an interview with Bloomberg TV last week that the bank would resume rate hikes if inflation risks materialize.

The slowdown was mainly driven by a decline in the transport component of inflation, which fell 2.6% from a year ago — including a 16.8% drop in fuel prices — which dragged the category into negative territory for the first time since January 2021.

Food and non-alcoholic beverage inflation cooled to 9.9%, compared with 11% in June, in further encouraging news for the central bank, which has highlighted double-digit food price gains as a concern.

Core inflation, which excludes the cost of food, non-alcoholic drinks, fuel and electricity, slowed to 4.7% from 5%.