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Inflation drop may mean cheaper interest

Economy
Johannesburg - South Africa’s consumer price inflation for April fell within the South African Reserve Bank’s targeted 3 to 6 percent range for the first time since August last year, brightening the prospects of a rate cut later this year as some economists expect the Reserve Bank to adopt a “dovish” stance amid the improving inflation outlook.

The South African headline consumer price index (CPI) eased to 5.3 percent in April year-on-year, down from 6.1 percent in March, Statistics South Africa said on Wednesday.

NKC African Economics senior economist, Elize Kruger said that the lower-than-expected headline consumer inflation in April was likely to improve the inflation outlook and prompt the Reserve Bank today to revise downwards the CPI forecast for this year from 5.9 percent to as low as 5.6 percent.

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Kruger said the April inflation, which is slightly higher than the 5.2 percent in December 2015, could prompt the Reserve Bank to adopt a “dovish” stance today in the face of the apparent turn in inflation.

At the end of its March Monetary Policy Committee meeting, the Bank said inflation next year was likely to average between 5.5 percent and 5.4 percent and forecast an average 5.5 percent in 2019.

Resilient

Wednesday's inflation numbers strengthened the case for a rate cut, especially given that the rand has been resilient for the past two month, despite the recent downgrades in the country’s sovereign credit rating. “But it is important to look at the average inflation for the year instead of one month,” Kruger said.

In addition to the expected revision in the CPI forecast, the bank could also revise the gross domestic product (GDP) forecast for the year from 1.2 percent to approximately 1 percent.

Francois Stofberg, an economist at the Efficient Group, said the drop in inflation was unexpected.

“It is, however, good news as the momentum of inflation reductions since December might help to eventually stabilise prices at a rate lower than was initially anticipated.

Read also: How South Africans are dealing with inflation

“We are only a bit concerned about the impact higher crude oil prices will have on our basket of prices in South Africa - higher petrol prices might offset some of the recent decreases in food prices,” said Stofberg.

He said the lower-than-expected inflation gave further support for a rate cut, but not immediately.

“The reason for this is the mounting uncertainty around medium-term inflation expectations, rand volatility, expected GDP growth, and political instability. We believe that the (Reserve Bank) will wait for more information concerning these uncertainties, before they decide to start cutting rates,” he said.

In a report yesterday, Sanisha Packirisamy of Momentum Investments, said even though the company had projected inflation to reach almost 5percent on average next year, currency risks due to faster than expected interest rate increases in the US and the possibility of further credit downgrades limited the scope for interest rate cuts.

“Ongoing political noise has raised the risk of higher inflation and lower growth outcomes in the domestic environment, while SA’s ongoing vulnerability to foreign capital flows sustains rand risks.

“As such, Momentum Investments expects the [Reserve Bank] to maintain interest rates at the current 7 percent level at the upcoming meeting,” said Packirisamy. The repo rate is 7 percent, equating to a prime lending rate of 10.25 percent.

Econometrix said the full impact of the end of the drought conditions and the ongoing strength of the rand should see the inflation rate fall down further in the remainder of this year.

In a statement, Old Mutual Investment Group said its economists expected one interest rate cut before the end of this year and two cuts next year.

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