South Africa’s targeted headline consumer price index (CPI) inflation slowed to 8,1% year-on-year (y/y) in January but was above forecasts, although this was unlikely to dim expectations of an early interest rate cut.
Statistics South Africa said on Wednesday that inflation slowed from 9,5% in December, while month-on-month inflation stood at 0,4% in January, the first month under a revised, re-weighted price basket.
This is the fifth monthly decline after the record 13,6% registered for CPIX — the old targeted measure — in August last year and the 13,7% for the old CPI in August.
The data came a day after figures showing the economy shrunk by 1,8% in the fourth of quarter of 2008, the first contraction since 1998. This reinforced the possibility that the Reserve Bank could call an emergency policy meeting before its next scheduled decision in April to cut rates further.
The central bank has already reduced rates by 150 basis points since December, following 500 basis points of increases between June 2006 and June 2008 aimed at taming inflation.
Price pressures are showing signs of ebbing, while the economy is feeling the strain of a global downturn.
A Reuters poll of 15 economists had forecast CPI would slow to 7,5% year-on-year and be at -0,3% on a monthly basis.
”Certainly it’s at the high end of expectations, but right now monetary policy is going to be dictated far more by concern over the real economy and economic growth than it is by inflation,” said Jeff Gable, head of research at Absa Capital.
”Inflation is significantly lower than it was six months ago. Inflation is likely to fall further as we go into the year, economic growth is falling very rapidly and all the signs from the global economy are that the downside risks to growth are significant.”
Fanie Joubert, an economist at Efficient Group, said of the data: ”It’s slightly higher than what the market expected, but it is a meaningful cooling from the 9,5% in December. It shows that the decelerating trend in inflation is continuing. But on this level of 8,1%, it doesn’t justify an emergency rate cut.”
Chris Hart, an economist at Investment Solutions, agreed: ”The CPI figure very unfortunately does tie the hand of the Reserve Bank. Clearly, the GDP is screaming out for rate cuts and the CPI is not reflecting the completely benign picture. It is very negative for the bonds and equity markets.”
South African government bonds weakened and yields rose after the inflation data. The new CPI basket, and particularly a lesser weighting for food prices which are a key driver of inflation, was seen as helping to cut the headline number sharply.
CPI replaces CPIX, which stripped out mortgage costs, as the central bank’s targeted measure.
Statistics SA said food increased by 1,9% month-on-month, largely due to higher vegetable and fresh meat prices, and services costs were up 0,8%.
The food price increase was the biggest month-on-month rise since Statistics SA started basing calculations on the new weightings a year ago.
Lower petrol prices, however, helped to cool overall inflation, with transport prices falling 3,1% month-on-month .
Solidarity pushes for rate cut
Meanwhile, the trade union Solidarity on Wednesday labelled the current interest rate ”a drag” on the South African economy and urged the Monetary Policy Committee to call an extraordinary meeting in order to make a further adjustment to the interest rate.
”The current monetary policy stance does not agree with the aim of the fiscal policy and that is why it has become imperative for Tito Mboweni and his team to cut interest rates,” explained Solidarity spokesperson Jaco Kleynhans.
”It is the Reserve Bank’s mandate from the government to control inflation and it is clear that the monetary committee has now achieved this goal because inflation has been brought much closer to the set target of between 3% and 6%.
”The current high interest rate being maintained by the South African Reserve Bank is, however, a drag on government’s efforts to stimulate economic growth.”
Solidarity argues that government’s budget is structured in such a way that it must encourage economic growth in these difficult conditions.
However, this goal is severely limited by the sustained pressure the high interest rate has on consumers and companies.
The trade union believes that a drop in the interest rate of at least 1% would place much-needed money back in consumers’ pockets and would, in turn, encourage higher spending and eventually help promote growth. In addition, it would give companies the opportunity to do the necessary expansion. — Reuters and I-Net Bridge