South Africa’s targeted consumer inflation is likely to have slowed further in July on easing food prices and depressed local demand, a Reuters survey showed on Friday.
South Africa is in its first recession in almost two decades with gross domestic product falling by 3% in the second quarter — the third consecutive quarter of decline.
The central bank surprised by cutting the repo rate by 50 basis points to 7% last week on concerns that the recession could be deeper than previously thought, bringing cuts since December to 500 basis points.
The bank had left rates unchanged in June but it said adverse economic conditions appeared to have tilted the balance of risk to the inflation outlook towards the downside.
Headline CPI inflation has declined steadily since peaking above 13% year-on-year in August last year.
A Reuters poll of 16 analysts showed CPI inflation is seen slowing to 6,6% year-on-year in July from 6,9% in June. One economist saw it dipping below the upper end of the 3% to 6% band targeted by the central bank.
Food prices, which helped keep inflation outside the target band for more than two years, are seen easing.
”Food is likely to drop again as producer pressures finally feed through, though at a slower rate than last month,” said Peter Attard Montalto, emerging market economist at Nomura.
The jury was still out on whether the expected decline in inflation could lead to another rate cut before year-end.
”We don’t think there’s scope for another rate cut, they’ve done all they could, but they did surprise us in August, so we don’t know,” said Freddie Mitchell, economist at Efficient Group, forecasting annual CPI at 5,8% due to depressed demand.
The central bank last week said it would take some time for inflation to return to its target range on a sustainable basis but it should enter the band in the second quarter of 2010.
Some analysts said an electricity price increase of 31,3% in July, a fuel price rise combined with a number of service surveys were seen limiting the slowdown in CPI.
On a monthly basis headline CPI was expected to accelerate to 1,1% from 0,4% in June.
Producer inflation is seen quickening to 2% month-on-month versus 1,5% previously while falling by 4,7% on an annual basis from a 4,1% decline in June.
”We are in a recession and prices are … actually falling in some industries,” said Annabel Bishop, economist at Investec.
The recession is expected to have limited private companies’ appetite for loans, which will see growth in demand for credit brake further, edging ever closer towards zero growth.
Private sector credit extension, to be released on August 31, was seen slowing to 3,45% year-on-year compared with 3,98% in June while the M3 measure of money supply was expected to brake to 5,7% from 6,04%.
The trade balance, released on the same day, is likely to register a small surplus of R500-million compared with a R3,22-billion surplus in June. — Reuters