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Lesetja Kganyago, governor of the Reserve Bank.
Lesetja Kganyago, governor of the Reserve Bank.

No rate rise likely as inflation slows

ECONOMIC NEWS - Jan 22nd 2015, 13:33

Inflation slowed last month amid lower fuel prices and a slower pace of increase in food prices — almost guaranteeing that interest rates would remain unchanged next week. 

Bonds firmed on the better-than-expected inflation data, while the rand was little changed.

Inflation slowed to 5.3% last month compared with a year ago — its lowest since November 2013 — from 5.8% in November and against a forecast of 5.5%.

Inflation is now well within the South African Reserve Bank’s 3% - 6% target band, implying that the Bank has little reason to be in a hurry to increase rates again. Expectations that inflation will fall further have raised questions about the possibility of a cut in interest rates.

Bank governor Lesetja Kganyago said on Wednesday that policy makers wanted to assess the effect of lower oil prices on the wider economy before making a call on whether to cut interest rates.

While plunging oil prices had improved the inflation outlook, the central bank wanted to see the "second-round effect" on prices, Mr Kganyago said in a Bloomberg interview at the World Economic Forum in Davos, Switzerland.

Oil prices have more than halved to almost $50 a barrel in less than a year. SA has reaped the benefits through lower prices at the pumps.

The fact that the petrol price fell a more significant R1.23/l this month and that another price cut of about R1 is being projected for next month means that inflation will fall even further in those months.

Economists forecast inflation could fall even to about 4% in coming months. The extent of rand weakness will determine how far inflation moderates.

Bank of America Merrill Lynch SA economist Matthew Sharratt said he expected inflation to fall to 3.3% by April. A 69c/l fall in the petrol price last month, slowing food inflation, and lower increases in owners’ equivalent rent and housing rentals, were responsible for inflation coming in lower than expected last month.

The oil price "scenario" that was unfolding for this year suggested that inflation would remain within the target band for at least 12 months, according to KADD Capital economist Elize Kruger.

An improving inflation outlook, "mediocre" economic growth, power supply constraints, possible tax increases and further administered price increases, were some of the factors that would make it "difficult" for the Reserve Bank to find real "sensible justification" for any changes in interest rates, Ms Kruger said.

Mr Sharratt said he expected the Bank to leave the repo rate unchanged at 5.75% this year and to renew its rate-tightening cycle with a 25-basis-point increase in January next year. Rates were raised by a cumulative 75 basis points last year.

Successive fuel price declines and slowing inflation will put some money back into the pockets of consumers ahead of July’s almost 13% electricity tariff increase.

Old Mutual Investment Group senior economist Johann Els said consumers spent R106bn on fuel last year.

Consumers were expected to save R20bn on their fuel bills this year due to fuel price decreases.
With inflation not expected to breach the target any time soon, the risk to future local interest rate increases is how much the rand will weaken once the US Federal Reserve starts raising interest rates.

Statistics SA data also showed that core inflation — which strips out food, petrol, and energy — slowed slightly but remained high at 5.7%.

Capital Economics economists said that any talk of rate cuts looked premature given the strength of core inflation.From DFM Publishers (Pty) Ltd 

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