Inflation data leads to rate-cut expectations

As consumer inflation eased for a second consecutive month, rate-cut expectations grew, with economists expecting the South African Reserve Bank to cut rates in February 2009 by 50 basis points (0,5 %).

”Thereafter we expect the bank to cut rates by a further 200 basis points over the course of the year,” Nedbank Group’s economic unit said on Wednesday.

Consumer inflation finally appeared to have developed ”some downward momentum”, it added.

Earlier, Statistics South Africa said October inflation had eased to 12,4% year-on-year from 13% in September.

Fuel was once again the main reason for inflation easing.

According to the data, it appeared that food prices had peaked, Nedbank said.

Prices of durable goods remained ”fairly static”, reflecting very weak domestic demand, which was limiting retailers’ ability t o increase prices.

Nedbank expected consumer inflation to decline again in November, moderating further to below 10% in the first quarter of 2009. The decline would be due to falling oil and food prices, as well as the introduction of the new inflation methodology in January next year.

Although the weaker rand was a concern, it wasn’t likely to alter the inflation outlook, Nedbank said.

It added that a greater concern lay with the country’s economy.

”Tuesday’s GDP figure confirmed expectations that economic growth is faltering, hobbled by high interest rates and a weak global economy.”

Although a rate cut in December was possible, Nedbank believed this was unlikely.

”First, the Reserve Bank might be concerned that a cut may have a disproportionate impact on the rand in thin markets over Christmas.

”Second, the authorities may also be concerned that it might send the wrong message to households.”

After December, the Reserve Bank’s monetary policy committee (MPC) would meet again February.

”By then the MPC will be faced with further evidence that the economy is very weak and inflationary expectations would also have moderated further.

”As a result, they will probably opt to cut rates by 50 basis points,” Nedbank said. — Sapa

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