SA Inflation Slows to 4.2%
Positive news on the inflation front has provided ammunition for those who believe the Reserve Bank should cut its repo rate from its present level of 6.5 percent. Statistics SA reported yesterday that consumer inflation came in at an annual 4.2 percent in June, down from 4.6 percent in May and better than the 4.5 percent median estimate of 21 economists polled by Bloomberg. Ian Cruickshanks, the head of strategic research at Nedbank Capital, said that after the data was released the money market started betting on a 60 percent chance of another 50 basis point cut in the Reserve Bank's repo rate. Expectations of another cut were reflected in forward rate agreements, contracts that run for three months starting some time in the future. Last month's figure is the fifth in a row that has been within the Reserve Bank's 3 percent to 6 percent target range. Jean-Francois Mercier, an economist at Citi, pointed out that inflation was now in the lower half of the range. Razia Khan, the head of Africa research at Standard Chartered, said: "Inflation was flat in the month of the World Cup, when one would have expected to see much more evidence of opportunistic price increases." She said the Reserve Bank would never base an interest rate decision on one month's inflation data alone. "And even if (consumer inflation) were to remain subdued for a number of months near term, that in itself would not be sufficient reason to ease again." But she argued that "combined with evidence that South Africa's recovery may be stalling, that the leading indicator has turned down again, that unemployment continues to rise and, generally, that domestic demand remains much weaker than the authorities should be comfortable with, we think the case for a rate cut at the September monetary policy committee (MPC) meeting remains very much in place". Annabel Bishop, a group economist at Investec, predicted inflation would fall to 4 percent over the next couple of months. Her estimate was more optimistic than the 4.5 percent third-quarter trough forecast last week by the MPC.
Bishop said the Reserve Bank's real repo rate had risen by 1 percentage point since the bank cut its repo rate to 6.5 percent in March. At that point inflation was running at 5.1 percent. The real rate is the nominal rate minus the inflation rate. Both Khan and Bishop cited rand strength as an additional reason for cutting the rate. The Reserve Bank and Treasury are trying to rein in the rand with currency market intervention, to help exporters compete with producers abroad. But higher rates in South Africa attract funds raised in countries with low interest rates, because it allows investors to make a profit on the differential. After the bank's decision last week to keep the repo rate on hold the currency appreciated from R7.54 ahead of the meeting to R7.45. It was bid at R7.3384 at 5pm yesterday . Kevin Lings, a Stanlib economist, said: "On balance we think the Reserve Bank will keep rates on hold for the remainder of 2010 but the window of opportunity to cut rates is still open. More importantly, a hike in rates is now a... long way away." Michael Kafe, a Morgan Stanley analyst, said that only a "significant deterioration" in the global outlook would persuade the MPC to cut in September. Barclays Capital said: "The downside surprise in the June inflation figures stemmed largely from a bigger-than-expected fall in vehicle price inflation." Vehicles prices fell 0.9 percent year on year after contracting 0.6 percent in May. An important factor in moderating inflation is that food inflation has disappeared for the moment. Food prices were flat in the 12 months to June and fell 0.3 percent from May. Still boosting annual inflation were prices of petrol, up 12.5 percent; alcohol and tobacco, up 10.8 percent; and electricity, up 24.7 percent.
Source: Business Report
