SA inflation brakes, big rate cut likely

South African inflation braked sharply in December, partly on a big drop in fuel costs, data showed on Wednesday, hardening the case for an aggressive interest-rate cut next week.

Statistics South Africa said CPIX (consumer inflation less mortgage costs)—which will be replaced in January as the targeted measure for monetary policy with a re-weighted consumer price index (CPI)—slowed to 10,3% year-on-year.

December’s reading was its lowest level since March 2008, dipping from 12,1% in November, and confirms price pressures are fast receding in Africa’s biggest economy.

All-items CPI slid more-than-expected to a one-year low of 9,5%.

Analysts said the trend—CPIX peaked at 13,6% in August last year—opens the way for a 100-basis-point interest-rate cut on February 5.

“The inflation releases will reinforce the market’s expectation of aggressive easing by the SARB [South African Reserve Bank],” Razia Khan, regional head of research for Africa at Standard Chartered, said.

“A cut of 100 basis points at the February meeting ... now looks almost certain.”

The central bank cut its repo rate by 50 basis points to 11,5% last month to start unwinding the five percentage points in hikes—all 50 basis point increases—between June 2006 and June 2008 aimed at reining in spending and inflation.

Consumer spending has since slowed sharply, with retail sales contracting and new vehicles sales plunging, and the economy as a whole is under strain.

Fuel cuts
Economic growth skidded to a decade low of 0,2% in the third quarter of 2008, and some analysts are predicting a technical recession in 2009.

Manufacturing production is falling and mining output has long been in decline, with growth largely propped up by massive government infrastructure spending.

Inflation was seen dipping even further in January after a second consecutive month of big fuel price cuts, and the introduction of a revised and re-weighted targeted measure.

A new CPI basket will change the way housing costs are calculated and reduce the weighting for food, the biggest driver of inflation. Food inflation remained stubbornly high at 17,1% year-on-year in December.

Fuel costs—previously a key source of faster inflation—have fallen rapidly.

The price of the most-used petrol in Gauteng dropped by 18% in both December and January, bringing cuts since a July’s high to almost 50%.

A tick up in international oil prices and a weaker rand will likely force an about 8% increase in February, though.

Stats SA said on a monthly basis, CPIX fell by 0,9% in December, while CPI stood at -1,1%.

“This is certainly a welcome surprise and suggests that the disinflationary trend is even sharper than we expected,” Barnard Jacobs Mellet economist Elna Moolman said.—Reuters

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