South Africa’s inflation rate fell below the Reserve Bank’s target ceiling for the first time in 14 months, on lower food costs.

Consumer prices rose an annual 5.4% in June from 6.3% the previous month, Statistics South Africa said on Wednesday in a statement on its website. The median estimate of 22 economists in a Bloomberg survey was 5.5%.

The central bank, which concludes a policy meeting on Thursday, targets price growth at 3-6% and prefers to anchor inflation expectations at the midpoint of the range.

The majority of those polled in a rate-decision survey ahead of the data expected the Reserve Bank would look past an easing in price pressures and raise interest rates by a quarter point to 8.5%, extending its longest phase of monetary tightening since 2006.

However, following the better-than-expected data, traders curbed bets on a rate hike on Thursday. Forward-rate agreements were pricing in just five basis points of tightening, or a 20% chance of a 25-basis-point hike. That compares with 44% at the start of the week.

The yield on 2026 government bonds fell nine basis points to 8.94% by 10.05am in Johannesburg, on track for the lowest close in more than two months. The rand was little changed at R17.85/US$, holding its 5.5% gain this month.

Yet more tightening?

The Reserve Bank has delivered 475 basis points of tightening since November 2021 to tame inflation. Governor Lesetja Kganyago and his deputy Kuben Naidoo said earlier this month that only once the MPC is confident that inflation is returning to the midpoint of the target range will it stop tightening policy.

Those predicting the central bank will hike forecast it to do so after inflation expectations rose in the second quarter.

“Anchoring inflation expectations more firmly around the midpoint is a key focus of the Sarb’s reaction function,” said David Faulkner, an economist at HSBC Securities, ahead of the data release. “The second quarter survey of financial analysts, businesses and trade unions showed that despite the recent moderation in price pressures, current year expectations rose by 20 basis points to 6.5%, while inflation expectations for 2024 nudged 10 basis points higher to 5.9%,” he said.

Food and non-alcoholic beverage inflation slowed to 11% from 11.8% in May and core inflation, which excludes the cost of food, non-alcoholic drinks, fuel and electricity, eased to 5% from 5.2%. — Monique Vanek, with Simbarashe Gumbo and Robert Brand, (c) 2023 Bloomberg LP