February 23, 2004

By Vernon Wessels

Johannesburg - The Reserve Bank is expected to keep interest rates on hold after its two-day monetary policy committee meeting ends on Thursday - despite indications that consumer and producer prices fell last month.

On Wednesday Statistics SA will release the headline consumer price index (CPI) for January. This is forecast to fall by an annual 0.1 percentage point following a 0.3 percentage point rise in December, according to a survey of economists conducted by Reuters.

The central bank's targeted measure of inflation, CPIX, headline inflation less mortgage rates, was forecast by the economists to have slowed to 3.9 percent in January from 4 percent in December.

Eleven of the 14 economists polled by Reuters predicted rates would remain unchanged.

The producer price index (PPI), which measures the rate of increase in the prices of goods leaving factory gates to retailers, was expected to fall in January for the fifth consecutive month, by 1.1 percentage points after a decline of 1.8 percentage points in December.

The PPI will be released early on Thursday morning but is unlikely to sway the Reserve Bank as it prepares to announce its decision on interest rates at 3pm that day. 

The Reserve Bank has to look forward at least 18 months in terms of future pricing pressures and not backwards. Johan Rossouw, the chief economist at Vector Securities, said this meant the window for rate cuts in the current cycle had closed.

Annabel Bishop, an economist at Investec, expects CPIX to rise back over 4 percent in February and remain between 5 percent and 5.5 percent next year.

"Robust consumer spending is expected this year which, with an expected widening of the current account deficit [the trade account is expected to have fallen back into deficit in January] a sharp pick-up in consumer credit growth and rising real wages, should contribute to staying the monetary policy committee's hand," she said.

Colen Garrow, an economist at Brait, said the rate decision was not totally clear-cut, as recent comments from members of the monetary policy committee on inflation had been dovish - that is, optimistic.

If the Reserve Bank left rates unchanged, rand strength might persist, which should benefit prices, he said.