Mariam Isa
28 May 2009
Johannesburg — INFLATION subsided more slowly than expected last month, but the odds are still very much in favour of the Reserve Bank cutting interest rates aggressively today.
Confirmation that the economy slipped into its first recession in 17 years will take precedence over the fact that inflation is still well above its official target range.
Consumer prices rose 8,4% in the year to last month, below a rise of 8,5% in March but above consensus forecasts for an 8,3% rise, Statistics SA said yesterday.
Analysts say the figures pale in comparison with Tuesday's news that economic output shrank 6,4% in the first quarter, its steepest fall in nearly a quarter of a century.
Thebe Securities economist Monale Ratsoma said members of the Bank's monetary policy committee (MPC) would have been "bombarded with calls for an aggressive rate cut" as they began their two-day meeting yesterday.
"We suspect that the inflation numbers today will have no bearing on the outcome of the meeting, and a full percentage point cut now looks like the most likely outcome," Ratsoma said.
The Bank has lowered the repo rate by 3,5 percentage points to 8,5% since December, but this week's dismal economic data showed that lower lending rates had so far not boosted output.
Gains in the rand, which jumped more than 2% to an eight- month peak at R8,08/ yesterday, also support the case for a hefty rate cut as its strength makes imports less costly.
The metalworkers union marched to the Bank in Pretoria yesterday, demanding a drastic cut in interest rates and an end to the official policy of targeting inflation.
Inflation measured by the annual rise in consumer prices breached its 3%-6% target for two years running, giving weight to calls by critics to scrap the official mandate.
Bank governor Tito Mboweni has defended the policy staunchly, saying inflation erodes the buying power of poor people. He and other MPC members have given the shrinking economy priority over a near-term deterioration in SA's inflation outlook.
Nedbank economist Carmen Altenkirch said: "Inflation is proving to be much stickier than we had assumed given the reduction in commodity prices late last year and the sharp contraction in domestic demand.
"But the Bank will look beyond the next few months' inflation figures and continue to focus on the medium-term inflation outlook as well as the severe contraction in domestic economic activity."
Higher petrol and food prices were responsible for most of the 0,5% monthly increase in consumer prices. Food and beverage prices were also key culprits behind the annual rise in CPI, although their pace of increase slowed to 13,7% from 14,7% in March.
Clothing, footwear and healthcare prices also increased.
A rebound in oil prices poses a threat to the inflation outlook, although the rand's gains have helped offset that to an extent. Oil prices have climbed 35% so far this year while the rand appreciated more than 17% to the dollar.
The prospect of higher electricity prices is a big risk after a request by power utility Eskom for a 34% tariff hike this year. Nor do double- digit wage hikes bode well for the inflation outlook.
An inflation expectations survey has also sent a worrying message, showing business and trade unions, the main price setters in the economy, see inflation stuck well above 9% this year.
Their expectations clash with those of financial analysts, who generally agree with the Bank's view that inflation will fall to an average 5,4% by the final quarter of
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next year. But many economists think the scope for further rate cuts is limited, if the Bank wants to meet its inflation mandate.
Some see the repo rate falling by another two percentage points this year, while others see the Bank moving much more cautiously.
"While it is difficult to say where the Bank will view the balance of risks, we increasingly view risks to inflation on the upside, and expect a 50 basis point reduction in the repo rate tomorrow," said Standard Bank economist Danelee van Dyk.
"We estimate inflation to average marginally above 7% this year as wage increases, administered prices and other cost pressures permeate consumer inflation."
isam@bdfm.co.za
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