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Rate cuts possible
Rate cuts possible

Inflation opens rate cut window


Fin24 - Apr 15th 2010, 13:33

Johannesburg - Inflation delivered yet another surprise on the downside on Wednesday, with the July rate of change in the consumer price index (CPI) coming in at 3.7% from 4.2% in June, immediately reigniting speculation that an interest rate cut may be on the cards next month. 

The rate was the lowest since July 2006 and is well below the midpoint of the Reserve Bank's 3% to 6% target range for inflation.

The fall came despite a sharp spike in electricity tariffs, which Statistics SA said was 16.3%. The power price hike and an 8.8% increase in water and other services led to a month-on-month increase in the housing and utilities index of 3%.

The reason for the surprise decline in inflation - which had been expected at 4% - was a sharp drop in the restaurants and hotels index, which fell 3.9% between June and July, mainly due to a 15.4% decrease in hotel accommodation prices. Econometrix economist Azar Jammine said this component of the CPI had risen sharply in June and had unwound after the 2010 FIFA World Cup.

Another factor helping to pull inflation down was the fall in the petrol price, with the transport index decreasing by 0.4% between June and July. The extent to which the petrol price is helping to keep inflation low is clear from the annual rate of change in the transport index, which slipped to only 1.1% from 2.2% in June 2010.

Food, a major disinflationary factor in the past, showed some signs of a price revival in July. The food and non-alcoholic beverages index increased by 0.3% between June and July and the annual rate of change again surpassed 1%.

Will the MPC do it one more time?

This is still exceedingly low, and it's clear that food disinflation has been one of the major reasons why inflation has fallen so sharply in the recent past. Excluding food, inflation would be 4.2%.

Standard Bank economist Shireen Darmalingham said the figures "opened the door" for further easing in monetary policy, particularly as gross domestic product growth had been disappointing at 3.2% in the second quarter. She said inflation had probably bottomed, but would in future be lower than had been expected.

Jammine said there was a lot of pressure on the Reserve Bank to cut the repo rate. The bank has cut the rate by 5.5 percentage points since December 2008.

"Given the weak growth figures, I'm tempted to say there will be a rate cut in September. That will be the last window of opportunity for the Reserve Bank, because the statistical factors that have helped inflation decline will fall away," Jammine said.

Nedbank's Carmen Altenkirch said: "Today's (Wednesday's) inflation figure strengthens the case for further monetary easing in September. The weaker growth picture, coupled with a subdued inflation outlook and a very strong rand, will also weigh strongly on the decision to lower rates one last time this cycle."

Targeted inflation has declined from a recent peak of 13.6% in August 2008 and edged below 6% in February. Most economists expect inflation to move upwards in the year ahead, but to stay below the 6% upper limit of the target range. 

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