IMF and World Bank hold Annual Meetings in Washington
IMF and World Bank hold Annual Meetings in Washington

Nine-year low in inflation may lead to interest rate cut in January

By siphelele.dludla Time of article published Dec 12, 2019

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JOHANNESBURG - The South African Reserve Bank (Sarb) might have enough room to cut interest rates in early January following the nine-year drop in inflation for November as the pace of price increases slows down.

Economists’ opinion yesterday dovetailed on the possibility of a cut after Statistics South Africa (StatsSA) revealed that annual inflation eased to 3.6percent in November from 3.7percent in October, due to lower transport inflation after petrol and diesel prices decreased by 13cents a litre and 14c/litre respectively at the beginning of the month, bringing the annual decline for the year to R1.

Senior research analyst at FXTM, Lukman Otunuga, said low inflation would strengthen the rand against the dollar, and markets would expect the Sarb to lower the interest rates.

November’s reading was the third successive month of falling inflation, and the lowest since December 2010, when the rate was 3.5percent.

“Annual inflation in South Africa has cooled to its lowest level since December 2010, market speculation around the Sarb easing monetary policy in 2020 should increase, should the data mirror market expectations, and the rand is poised to appreciate against the dollar,” Otunuga said.

The transport category moved into deflationary territory in November, showing an average annual price decrease of 0.3percent.

However, consumer prices increased 0.1percent over the previous month.

StatsSA said the annual deflation means that overall prices were lower in November than they were in the same month last year. The highest rate recorded since December 2010 was 7percent in February 2016.

The Sarb left the repurchase rate unchanged at 6.5percent at its meeting at the end of November, despite an expected cut of 25 basis points, as food inflation continued to surprise on the downside on a monthly basis.

Investec economist Kamilla Kaplan said food price inflation remained in line with October’s reading, at 3.5percent year-on-year, adding 0.6percent to the headline outcome, on the back of its significant 15.48percent weighting in the inflation basket.

Kaplan said the food price inflation trajectory should remain relatively muted going forward, provided that South Africa avoids another drought that would materially affect supply conditions.

“From December, however, and into the first quarter of 2020, the year-on-year fuel price inflation rate is anticipated to lift on low statistical base effects,” Kaplan said.

“However, underlying fuel price inflation should be contained by the expected low international crude oil price amid weakening global trade and growth prospects.

“Overall, the outlook for inflation is relatively benign against a backdrop of softening global inflation, weak domestic demand, low exchange rate pass-through and slowing wage growth.”

StatsSA said housing and utilities; miscellaneous goods and services, and food and non-alcoholic beverages were the biggest contributors to the 3.6percent increase in November.

Food and non-alcoholic beverages inflation was 3.5percent, slightly lower than the 3.6percent recorded in October. Bread and cereal prices continued to climb, however, recording an annual rate of 8percent.


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