Mariam Isa
30 April 2009
Johannesburg — INFLATION slowed less sharply than expected last month, but that will not stop the Reserve Bank cutting interest rates by another full percentage point when its policy meeting ends today.
Consumer prices rose 8,5% compared with March last year, a bit below the 8,6% recorded in February but above consensus forecasts for an 8,4% increase, official figures showed yesterday.
During the month, the consumer price index (CPI) rose 1,3%, quickening from 1,2% in February as prices rose for alcohol, fuel, recreation and education.
Rand weakness, which has since been reversed, also played a role, making imports more costly. But given the ample evidence that SA has joined the global recession, the Bank's monetary policy committee (MPC) is set to give priority to reviving economic growth.
"It's not a good number. This tells us inflation is going to be a bit more sticky than initially expected," said Nedbank economist Isaac Matshego. "But we still expect the Reserve Bank to cut by 100 basis points (today)."
The Bank has lowered the repo rate by 2,5 percentage points to 9,5% since December, but it takes up to two years for changes in interest rates to make themselves felt fully in the economy.
Government bonds weakened on the news, with yields up on the view that rates may fall less sharply than expected this year. But the rand extended recent gains, rallying by 1,7% to R8,50/$, a new seven-month peak.
If sustained, rand strength will help keep inflation pressure at bay, giving the Bank more leeway to keep cutting interest rates in the months ahead to boost growth.
Speculation that economic output contracted by about 3% in the first quarter, nearly twice as much as in the previous quarter, has gained credence.
Economists believe increasingly that SA will remain mired in recession for most of this year as waning global demand erodes exports and consumer spending retreats.
Prices for goods, which have a weighting of 54% in the CPI, rose by an annual 8,7% last month, unchanged from February, while the rate of increase for services, which make up the rest of CPI, slowed to 8,4% from 8,5%.
Inflation for food and nonalcoholic beverages slowed to an annual 14,7% from 15,8% in February. But it was still the biggest price culprit, making up 2,3 percentage points of the annual 8,5% increase.
During the month, higher prices for alcohol and tobacco stemming from tax increases in this year's budget were the main inflation driver.
Recreation costs rose on a 45% increase in national lottery tickets while education fees, surveyed in March, jumped 10,5%.
"Inflation remains broadly based, but the MPC is likely to remain focused on the ailing real economy," said Absa Capital economist Jeffrey Schultz. Absa Capital sees the economy shrinking 0,5% this year, which would be its first contraction in 17 years.
Views are mixed on whether the Bank will alter its inflation outlook when it announces its interest-rate decision soon after 3pm today.
At its meeting last month, the MPC predicted CPI would fall back within its 3%-6% target range in the third quarter after breaching it every month since April 2007.
Most economists think this is still on the cards, although the near-term outlook for inflation has deteriorated somewhat.
In the first quarter, CPI rose by an average 8,4%, well above the Bank's forecast of 8,1%.
"While it is clear that near-term upside risks to CPI remain, today's number does not significantly alter our view of the medium term inflation trajectory," Rand Merchant Bank said in a research note.
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