South Africa's consumer inflation braked more than expected to 5.7 percent year-on-year in May from 6.1 percent in April, returning to the central bank's 3-6 percent target band, Statistics South Africa said on Wednesday.
On a month-on-month basis inflation also surprised to the downside, easing to 0.1 percent compared to 0.4 percent in April.
ANALYST COMMENTS
ELIZE KRUGER, ECONOMIST, KADD CAPITAL
“Quite a good number on the day. It's a low survey month so it's basically down low fuel and food prices.
“I think it confirms to us that inflation in South Africa is not a real problem anymore, despite the rand exchange rate's recent depreciation, I think we will see a benign inflation environment going forward.
“That obliviously opens up room for the Reserve Bank to focus a bit more on the growth side that seems to remain a concern. Therefore the debate about lower interest rates will be the order of the day in the next period leading up to the next MPC meeting.
“We haven't changed our view of an unchanged interest rate stance, the scale is however tipping somewhat towards the potential that there could be easing.”
ANNABEL BISHOP, GROUP ECONOMIST, INVESTEC
“CPI inflation came out better than expected in May ... The only increase in price pressure recorded on the month came from transport, due to the petrol price increase.
“We continue to believe that the Reserve Bank will leave interest rates unchanged this year, but should the global outlook deteriorate significantly further, then the Reserve Bank is likely to cut by 50 basis points in Q3 2012.”
PETER ATTARD MONTALTO, EMERGING MARKET ECONOMIST, NOMURA
“The charge lower in inflation has happened earlier than even we thought and means that inflation can be printing just above 5.0 percent by the end of the year and dip below 5.0 percent in Q1 of next year.
“Importantly, core actually fell back from 4.5 percent to 4.4 percent whilst non-core (food and petrol in particular) fell back faster still.
“Calls for cuts will now intensify but whilst we think this sort of CPI trend is a necessary condition for a cut we do not think it is sufficient.
“The Monetary Policy Committee already think they are well enough into accommodative territory.”
RAZIA KHAN, HEAD OF RESEARCH AFRICA, STANDARD CHARTERED
“Together with the SARB downgrading its inflation forecasts to much more benign levels, this will reinforce market thinking that there is some likelihood of easing if we see a further deterioration in growth.
“For our part - outside of a major global economic shock that alters the external environment meaningfully - we see little likelihood of a new rate cut. But it is noteworthy that even the Fund - looking at the fiscal consolidation that is planned - has been urging accommodative monetary policy to provide a boost to South African growth.
“With the ZAR still strong and likely to appreciate further still, with inflation having peaked at a much lower level that previously anticipated, with the economy seemingly in the doldrums forever, there is certainly little reason to anticipate a normalisation of interest rates any time soon. Hence our view that we will not see a rate hike this year.”
ELNA MOOLMAN, ECONOMIST, RENAISSANCE CAPITAL
“The downside was somewhat broad-based, although dominated by lower food inflation and particularly meat prices that continued to fall.
“For now my view is that interest rates will remain flat for the remainder of this year and through next year.
“There is a small chance of further monetary easing, but I believe it would require further deterioration in global growth prospects.”
CHRISTIE VILJOEN, NKC INDEPENDENT ECONOMISTS
“I like the headline number. It's low and that's always very good. It's the lowest since September of last year.
“The month-on-month number especially is surprisingly low. That's the lowest since November 2010 which was the last time the Reserve Bank adjusted the interest rate, which was down.
“This will fuel talk about a possible interest rate cut this year.”
MARKET REACTION
The rand was firmer at 8.2055 against the dollar from 8.23 before the data was released at 10:00 SA time. The yield on the 2026 bond fel to 7.99 percent by 10:40 SA time from 8.01 percent prior to the data, while the yield on the 2015 bond dropped to 6.005 percent from 6.045 percent.
BACKGROUND
- The South African Reserve Bank targets a 3-6 percent band for headline consumer inflation. The price index returned to the band in March after being outside it since November last year. It breached the top end of the range again in April.
- The Bank expects inflation to average 6 percent in the second quarter of this year and then gradually moderate within the target range.
- Reserve Bank governor Gill Marcus said earlier this month the depreciating rand exchange rate, which dropped to a three-year low of 8.71/dollar at the start of June, posed the main upside risk to the bank's inflation outlook.
- The market has started talking about the possibility of monetary easing taking place sooner that previous expectations as inflation moderates and economic growth struggles to gain traction. - Reuters