Economics Correspondent
THE latest consumer inflation figures should give some cheer to the monetary authorities, as inflation continues to spiral down to target.
Seven months after the Reserve Bank's targeted measure, CPIX (consumer inflation less mortgages) peaked at an annual rate of 11,3%, CPIX has slowed to an annual growth rate of 6,4% slightly above the 6% upper limit of the Bank's inflation target.
The moderating influence of the rand's strength has helped to bring inflation under control in the same way that the rand's crash in 2001 caused inflation to surge out of control last year, resulting in the Bank missing its inflation target.
While soaring food prices was one of the main culprits for rocketing inflation, the rand's 40% gain against the dollar last year has reined in food prices, since local grain prices are determined by dollar-based international grain prices.
Maize prices have more than halved since last year's peak of R2000 a ton, helped by the stronger rand, but also by an expected bumper maize crop this year.
Food inflation has slowed considerably in recent months, although there is still some concern that consumer food prices are rising at a far faster pace than at the producer level.
Yesterday's inflation figures showed that in CPIX, food prices increased 9% year on year, compared to 11,5% in May. Economists say there is still some downward pressure for food prices in coming months, although retail prices were stickier downwards.
"Given the plunge in food prices on the wholesale level, one would have expected a faster follow- through to prices at the consumer level. Hopefully, this has now starting to come through," says independent economist Noelani King Conradie.
Another benefit of the rand's appreciation is the knock-on effect on local petrol prices, which are dollarbased. In the latest CPIX data, transport costs declined by 0,5% year on year, mainly due to the recent 27c/l cut in petrol prices.
The authorities should be pleased with the latest data, which reflects decelerating inflationary pressure in the domestic economy.
The outlook for consumer inflation in coming months is also upbeat, if consumer prices follow the sharp deceleration of producer prices. The latest figures from Statistics SA show the Producer Price Index slowing to 1,1% year on year in May the lowest growth in more than 30 years helped mainly by the drop in imported producer inflation.
The better than expected consumer inflation figures have fuelled expectations the Bank may take another bold step in two weeks time and cut interest rates by 1,5 percentage points.
While the consensus is still for a 1 percentage point cut in interest rates, some economists believe the Bank may be persuaded to cut aggressively, given the rapid deceleration in inflation, the strong rand and the dovish tone of the last monetary policy committee meeting.
However, real interest rates are rising fast, putting a brake on economic growth.
"Real interest rates have risen sharply in recent months and risk eroding economic growth. Since CPIX peaked in November last year, real interest rates have increased by 3,4%, enough of an argument for the Bank to act aggressively and cut the repurchase rate by another 1,5 percentage points," says Conradie.
However, a counter-argument favouring more sedate cuts in interest rates rests on the possible negative effects of aggressive rate cuts on the exchange rate.
If, as many analysts believe, the rand's strength in the past year has been due to high domestic interest rates, the Bank may act more cautiously to avoid wild swings in the exchange rate, which in turn may affect inflation adversely.
Analysts believe that high local interest rates compared to rates among international trading partners has benefited the rand by attracting foreign investment into local bond and money market assets.
So, an aggressive easing of interest rates will erode that high yield advantage, resulting in a much weaker local currency.
Brait economist Colen Garrow believes the monetary authorities are likely to be conservative, because a rate cut in excess of 1 percentage point would tarnish the rand's high yield attraction.
Garrow says the rand may come under pressure later in the year as a result of a widening current account deficit and the narrowing of the interest rate differential.
"Another risk the rand may encounter is that deflation risk has reduced considerably since the US economy has entered a fragile phase of recovery.
"This suggests the US Federal Reserve may be less inclined to ease rates at a time when domestic rates are falling, narrowing the SA-US interest rate differential, which has played an important role in supporting the rand," says Garrow.
The Bank was also likely to act with more cautiously given yesterday's figures for private sector credit demand, which showed robust growth.
While the overall numbers for private sector credit extension (PSCE) remained distorted due to changes in the reporting of the investment figures, the underlying PSCE growth (excluding investments and bills discounted) increased from 11,74% in May to 12,68% in June.
Jul 30 2003 07:36:26:000AM Nasreen Seria Business Day 1st Edition
Publisher: Business Day
Source: Business Day
CPIX slows to 6,4%, fuelling hope for rates cut.
Posted On Wednesday, 30 July 2003 02:00 Published by eProperty News
Latest Statistics SA data reflects decelerating inflationary pressure on the SA economy.
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