The debate over interest rate cuts could knock next week’s discussions on the 2005/06 Budget from the headlines, an economist said on Friday.
”While the annual Budget speech should be the key topic of conversation next week, an expected decline in January CPIX inflation to below four percent could see the debate surrounding further interest rate cuts giving the minister of finance a run for his money in terms of publicity,” said John Loos, senior economist
at Absa.
Finance Minister Trevor Manuel will table his Budget before Parliament on February 23, and the CPIX (consumer price index minus mortgage costs) inflation figures would be released on the same day.
Loos said Statistics South Africa brought forward the release of the gross domestic product figures for the fourth quarter of 2004 so that information would be available when the Budget was tabled.
”Perhaps, though, they should have also considered moving the January consumer price inflation to some later date to avoid … Budget day unintentionally becoming a debate around monetary policy rather than fiscal policy.”
Loos said the outlook for CPIX was ”extremely positive”.
”An expected decline in CPIX inflation to 3,8% may prove to be the most positive news on Budget day from a market point of view, providing a major impetus for those calling for further interest rate cuts.”
CPIX in December stood at 4,3%.
The significant decline in year-on-year petrol price inflation from 22% in December to 11,6% in January — due to a 44 cents a litre monthly decline — would contribute to the drop in CPIX inflation.
A decrease in food price inflation — with a heavy 26% weighting in CPIX — would also play a part.
”The Economist [newspaper’s] global food price index showed year-on-year deflation of 19% in the first week of January in rand terms and 6,1% in dollar terms.”
As global food prices influence local agricultural markets, this decline is significant.
A low maize price would also keep food price inflation ”benign” in the January CPIX figure. This would probably continue in future months.
Loos expected future CPIX inflation figures to decline even further.
He attributes this to the difference between the domestic fuel price and global oil prices in the first half of last year, compared to 2005 prices.
”Domestic fuel prices, along with global oil prices, shifted to a significantly higher base during the first half of last year.
”Therefore, without much decline in either oil or local petrol prices from current levels, the year-on-year inflation rate could decline significantly.”
Loos said this happened in February when a decrease of two cents a litre in the Gauteng pump price saw a significant fall in year-on-year petrol price inflation from 11,6% in January to 2,9% in February.
A strong rand, partly attributed to dollar weakness, would lead to a further decline in CPIX inflation, Loos said.
He expected the dollar to weaken to around â,¬1,40 in the second half of 2005 under pressure from the huge US trade and current account deficits.
The rand could reach a rate of R5,50 to the dollar by the third quarter of this year, Loos predicted.
”There thus exists the real possibility that the CPIX inflation target could be missed in 2005 — on the downside — and we expect this to happen in the final quarter of this year.” – Sapa