Cash-strapped consumers breathed a sigh of relief yesterday as inflation dipped to its lowest in nearly 10 years, allaying fears that today’s decision by the SA Reserve Bank (Sarb) could curtail Christmas spending. Photo: Bongani Shilubane/African News Agency (ANA)

JOHANNESBURG – Cash-strapped consumers breathed a sigh of relief yesterday as inflation dipped to its lowest in nearly 10 years, allaying fears that today’s decision by the SA Reserve Bank (Sarb) could curtail Christmas spending. 

Data from Statistics South Africa yesterday showed that headline inflation eased to 3.7 percent year-on-year in October as food and alcoholic and non-alcoholic beverages, as well as tobacco and transport, contributed to the decline.

The slowdown marked the 31st month that inflation fell below Sarb’s target band of 3 to 6 percent. The market consensus was 4 percent.

In September, inflation declined to 4.1 percent.

Investec economist Kamilla Kaplan said the print was, however, unlikely to force Sarb’s hand to cut rates, due to fiscal deterioration, as the economy remained weak.

Kaplan said the moderation was mainly on account of the base effect induced downside price pressures stemming from the fuel price component. 

The slowdown came against a backdrop of a further deceleration in food inflation to 3.5 percent year-on-year from 3.7 percent in September.

Transport eased to 0.3 percent, contributing 0.1 percentage point to overall inflation.

“We expect headline CPI to remain broadly anchored around the midpoint of the Sarb’s inflation target band amid an inability to pass on material price increases to the consumer due to constrained consumer income growth,” FNB economist Matlhodi Matsei said.

“Moreover, subdued international oil prices will likely continue to contain the overall inflation trajectory.”

The Sarb’s Monetary Policy Committee (MPC) will today announce its rates decision. It cut the repo rate by 25 basis points in July from 6.75 percent to 6.5 percent, and decided to keep it unchanged in September.

The country’s weak fiscal position and the probable downgrade in February could, however, become the focal point of the MPC’s monetary stance.

Last month, the Sarb slashed the country’s growth forecast to 0.5 percent from 1.5 percent previously.

The Sarb warned that debt-to-growth domestic product could rise as much as 70 percent because of the national balance sheet’s porous state.

“The weak economic growth outlook for South Africa and moderating inflation expectations, as well as lower international policy rates, all would appear to lend support for domestic monetary easing,” Kaplan said. 

“However, Sarb is unlikely to reduce the repo rate at this week’s MPC meeting in view of the fiscal, and, by implication, the sovereign credit rating risks.”

The MPC said in October that its modelling pointed to a 25 basis-point cut, but the deteriorating fiscal outlook and political and policy uncertainty would limit its ability to cut the rate.

PPS Investments portfolio manager Luigi Marinus said the consistency of the dip could force the MPC’s hand.

“At 3.7 percent year-on-year, this is the lowest inflation measure since February 2011. At that time, the repo rate was 5.5 percent compared to the current level of 6.5 percent.

With the consistency of inflation below the midpoint of the target band, there seems to be little excuse for the Reserve Bank governor to not drop interest rates in the next meeting. History also suggests that at this low level of inflation there is some scope for a rate decline,” Marinus said.

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