Johannesburg — NEWS that inflation abated more than expected last month has turned predictions of an interest rate cut into a majority rather than a minority view among economists.

Inflation dipped to 3,7% from 4,2% in June, its lowest since April 2006. That was well below market forecasts for a 4% increase and took inflation closer to the bottom of its 3%-6% official target range.

Some economists expect inflation will stay below 4% over the next few months. That means the Reserve Bank's last estimate of 4,5% average inflation in the third quarter of this year is too high.

It is clear that the near-term inflation outlook has improved, but the medium-term outlook a year or two ahead - which is what matters to the Bank - is less certain.

Markets have moved to price in a near 100% chance that the Bank will trim its repo rate by half a percentage point to 6% at its next policy meeting early next month.

Focus has shifted to a sharp fall in the economy's pace of growth, which slowed to 3,2% in the second quarter of this year from 4,6% in the first quarter.

SA's growth momentum is likely to subside further in the second half of this year, as the boost from the Soccer World Cup fades and the global economy also retreats.

That should keep the so-called "output gap" - the difference between actual and potential production - wide enough to keep price pressures at bay. Weak domestic demand will also help.

At the same time, "real" interest rates - the difference between nominal rates and inflation - have climbed to unacceptable levels, says Brait economist Colen Garrow.

They may be too high to ease the debt burden on households, and encourage private companies to start investing again.

"I think there may now be enough to justify further easing (of interest rates)," says Cadiz African Harvest economist Adenaan Hardien. He is one of many analysts who have altered their view that interest rates will stay on hold until they start to rise late next year.

Standard Chartered regional research head for Africa Razia Khan believes that the justification for keeping prime lending rates set by commercial banks at 10% is "rapidly eroding".

She sees inflation hovering between 3,7% and 4% for the rest of this year, with the annual average at 4,5% -- the middle of the official inflation target.

Next year, she sees an inflation range of between 4,2% and 5,3%, rising to 5,1% -5,6% in 2012.

But it remains to be seen whether the Bank will alter its longer-term inflation forecasts. At its policy meeting last month , when it held rates steady, it predicted that inflation would rise above 4,5% in the fourth quarter of this year and reach 5,3% at the end of 2012.

The 2012 estimate is below Ms Khan's, and underlines the caution in the Bank's policy decisions.

On the other hand, there is a real threat to inflation from steep wage increases, volatility in the rand and SA's vulnerability to international oil and food prices.

The rand has appreciated since the Bank's monetary policy committee met last month , hovering at about R7,37 to the dollar, compared with an average of about R7,60 to the dollar in June.

Strength in the rand improves the inflation outlook, while making local exports less competitive in global markets.

"We do not believe that SA has suddenly become a low-inflation country," says Citigroup economist Jean-Francois Mercier. He believes that the "disinflation" trend in SA is temporary and that inflation will rise back to between 5% and 6% as early as next year.

"For that reason, we think that the outcome of the Bank's meeting is much more uncertain than fixed income markets are discounting."