Inflation dips below Sarb's midpoint target, signalling potential rate cut
JOHANNESBURG – South African headline consumer inflation extended its downward streak in September, putting pressure on the SA Reserve Bank (Sarb) to review its monetary stance next month, despite the country’s falling economic metrics.
Data from Statistics South Africa (StatsSA) on Wednesday showed that inflation eased to 4.1 percent last month, dipping below the bank’s midpoint target and continuing its downward trend since 2011.
The decline, which beat the market consensus of 4.2 percent, marked the 13th consecutive month that inflation was below the top end of the target band.
Investec economist Kamilla Kaplan said the consumer price inflation (CPI) was expected to average 4.2 percent this year and to rise modestly to 4.9 percent next year, mainly on account of statistical base effects.
“The effects of a generally weak demand environment are evident in the broader CPI dynamics, particularly for discretionary goods and services,” Kaplan said. This, coupled with the relatively low pass through from currency weakness, should offset the effects of robust administered price inflation.
Since 2000, the Sarb has targeted inflation to be within a range of 3 to 6 percent, while maintaining the repo rate between 6 and 7 percent.
In July, Sarb’s monetary policy committee (MPC) lowered the repo rate by 25 basis points to 6.5 percent, but left it unchanged last month, following sustained moderation in inflation outcomes.
The Sarb said it expected inflation to anchor near the midpoint at 4.2 percent as the overall risks to the inflation outlook were assessed to be largely balanced.
Economists yesterday said the inflation print could provide a clue to the MPC’s next move on interest rates, scheduled towards the end of the next month.
Senior FNB economist for property and consumer economics Siphamandla Mkhwanazi said the September data should give the Sarb more room to cut rates further.
Mkhwanazi said that if implemented, the cut would provide welcome relief to borrowers in these tough economic conditions.
“It should give a boost to the call for a cut in interest rates next month. If the inflation is well balanced, as it is right now, barring any exogenous upper shocks like oil prices, there is no reason the Reserve Bank should not cut interest rates.
“A 25 basis points on its own will not have any material effect, but should be a welcome relief considering we already had a cut this year,” Mkhwanazi said.
StatsSA said the slowdown came against a backdrop of softer food inflation, at 3.9 percent, and transport, which settled at 2.4 percent year-on-year.
Month-on-month inflation was, however, unchanged at 0.3 percent, with only small changes in contribution from food and non-alcoholic beverages.
PPS Investments portfolio manager Luigi Marinus said the previous MPC meeting had decided to leave interest rates unchanged, based partly on inflation expectation concerns.
“The latest inflation figure, however, does not align with the risk of increasing inflation and questions whether there should in fact be room for an interest rate cut,” Marinus said.
“Even though the South African nominal yield curve may be steep, it offers little compensation to consumers and businesses, with debt in a low-growth environment.”