Ethel Hazelhurst

News yesterday that inflation was lower than expected last month while consumer confidence dipped sharply in the second quarter supports the case for a cut in the Reserve Bank’s repo rate – at 5.5 percent since November 2010.

However, the market was unmoved and forward rate agreements continued to bet on only a 30 percent chance of a cut today, according to Nedbank.

Reserve Bank governor Gill Marcus will announce the decision of the monetary policy committee when she wraps up its meeting this afternoon.

If there is no move now, she could signal the chances of a reduction later in the year.

Statistics SA reported that consumer inflation fell to 5.5 percent in June, the lowest since August last year. The figure is below the 5.6 percent predicted by economists polled by both Bloomberg and Reuters, and down from 5.7 percent in May. Gina Schoeman, the lead South Africa economist at Absa, noted it was the third consecutive month the figure had surprised on the downside.

Inflation is subsiding globally. Data out yesterday showed consumer inflation in the UK dropped to 2.4 percent last month, the lowest level since December 2009. China reported earlier that inflation fell to 2.2 percent last month.

Reduced inflation expectations create more space for a rate cut, and the growth outlook, which has weakened in recent months, implies another cut is needed.

FNB and the Bureau for Economic Research reported that their consumer confidence index fell from five points in the first quarter to minus three in the second.

“Consumer confidence is at its lowest level since absorbing the serial shocks of early 2008,” FNB chief economist Cees Bruggemans said. “Coupled with the deterioration in the outlook for household income growth, the decline in consumer confidence foreshadows a substantial slowdown in household consumption.”

Consumption traditionally contributes more than 60 percent of the country’s gross domestic product each year.

Bruggemans noted: “This is the first time since 2004 that the majority of South African consumers expect economic conditions to weaken. Not even at the height of the global financial crisis in 2008 were consumers as downbeat.”

He referred to “a substantial drop in other confidence indices” in the second quarter.

He said: “In all likelihood, this reflects the recent deterioration in global economic sentiment, as well as in the domestic political climate.”

Other data released by Stats SA yesterday were more upbeat: retail sales rose 6.4 percent year on year in May after 1.1 percent growth in April.

Many economists argue that a rate cut will do little to boost confidence or growth. The local economy is battling headwinds from abroad and is held back by policy uncertainty at home. And low rates discourage already low savings, raising dependence on foreign flows.

Meanwhile, lower inflation makes consumers richer because their money is not eroded by sharp price increases.

The improvement is largely due to relief in two areas. Food price growth fell to 6 percent, from 6.8 percent in May and 9.1 percent in April. And petrol prices fell 4.6 percent in the month, cutting year-on-year inflation to 14.2 percent, from 19.4 percent in May.