STATISTICS SA will tomorrow release the last set of consumer inflation figures available to the Reserve Bank's monetary policy committee before it is scheduled to meet to decide whether interest rates should be cut or not.
Economists expect the Bank's targeted inflation measure, CPIX (consumer inflation less mortgages), to have slowed to an annual 10,4% last month from March's disappointingly high figure of 11,2%. The forecasts ranged between 10,2% and 10,8%.
The market expects the Bank to cut interest rates by 1% when the committee meets on June 11 and 12, given the steady downward trend in inflation in the past few months.
Evidence of a contraction in the manufacturing and export sectors of the economy as a result of the sharp appreciation in the rand and high interest rates is also likely to put pressure on the Bank to cut rates to support economic growth.
However, bearish statements by the Bank last month about the "uncomfortably high" probability that the inflation target next year would be missed, have raised doubts in some quarters that the Bank would lower interest rates next month.
The Bank has a target to limit inflation to between 3% and 6% by next year. It forecasts that CPIX may only fall within the target range by early next year, but average CPIX for the year would be only slightly below the upper limit of the target, increasing the risk that inflation may overshoot the target next year.
However, economists say the rand's strength this year is likely to put further downward pressure on food prices the main cause of inflation spiralling out of control last year and coupled with base effects, should see CPIX coming down sharply in the next few months.
Stats SA may also implement changes to the measurement of rentals in the housing component of consumer inflation, which could result in a lower CPIX figure for this month. Economists have pointed out that housing costs the largest contributor to monthly gains in CPIX may be distorted because of the outdated information for rents used by Stats SA. If this is corrected, CPIX may be reduced almost 2%, according to some economists.
Investec Asset Management's portfolio manager, John Stopford, said last month's monthly rise in CPIX of 0,5% was likely to be driven by housing inflation again.
Whether the Bank cuts interest rates next month depends largely on whether unit labour costs and inflation expectations remain high.
Standard Bank economist Monica Ambrosi said in a research note that wage growth and inflation expectations were expected to moderate during the year. This should motivate the Bank to cut interest rates sooner rather than later.
Standard has revised its forecasts on interest rates, expecting the Bank to lower the repo rate 1 percentage point next month. This, Ambrosi said, was largely because of the resolution of the conflict in Iraq, which has taken away many of the market uncertainties that could have an effect on inflation.
However, one of the unknown variables in the interest rate outlook remains the volatile rand. The local currency has had wild swings recently, first soaring to peaks of about R7,05 from R8,50 against the dollar, before plummeting back to R8,05 all within two weeks.
Analysts say the rand's meteoric rise in the past year has been linked to the interest rate differential SA's high interest rates relative to its main trading partners. This has lured foreign investors to local bond and money market assets, giving a temporary boost to the currency.
Recent volatility in the rand has been linked to the interest rate outlook, with an expected lowering of rates sending the rand lower against the dollar as the interest rate differential narrows.
Tomorrow's inflation figures are expected to be keenly watched by the currency market as well to give some indication as to whether the Bank will ease interest rates.
May 19 2003 06:42:50:000AM Nasreen Seria Business Day 1st Edition
Publisher: Business Day
Source: Business Day
Stats SA set to discuss interest rates.
Posted On Monday, 19 May 2003 02:00 Published by eProperty News
Body will tomorrow release final consumer inflation figures to the Reserve Bank.
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