/ 17 December 2008

More rate cuts in 2009, economists predict

With both inflation falling and the economy weak, the Reserve Bank will have ample scope to cut interest rates next year, Nedbank said on Wednesday.

With both inflation falling and the economy weak, the Reserve Bank will have ample scope to cut interest rates next year, Nedbank Group’s economic unit said on Wednesday.

It was commenting on inflation figures, released earlier by Statistics SA, which showed that consumer inflation had eased further for a third consecutive month.

Statistics SA said that November CPIX (headline inflation excluding mortgage interest costs) came in at 12,1% year-on-year from 12,4% the previous month.

”Interest rates are likely to be reduced by 50 basis points at each of the Monetary Policy Committee meetings in 2009, resulting in a further 300 basis point reduction during the year,” Nedbank said.

There might be a case for deeper cuts in the first half if the global and domestic climate worsened further, which was a very plausible scenario, Nedbank added.

”However, a pre-election cut of over 50 points may be controversial, probably ruling out such a move in February,” it said.

While inflation continued to drift lower in November, the figure was slightly less than market expectations.

”The slower-than-expected easing in inflation was mainly due to higher food prices.”

Higher prices for grain, meat, dairy products as well as fruit were the main contributors to the month-on-month increase.

On an annual basis, food prices continued to ease modestly, mainly reflecting base effects, Nedbank said.

Going forward, inflation was expected to moderate further, falling to below 10% in January next year, due to declining oil prices as well as base effects.

”The rebasing and reweighting of inflation will also contribute towards the drop in inflation,” Nedbank added.

Statistics SA announced in early December that the introduction of Owner’s Equivalent Rent, which is used to measure owner-occupied housing costs, would also contribute towards lowering inflation in January, when the new measure was introduced.

”With international food prices heading lower and a good summer harvest expected, food prices should also start to decline,” Nedbank said.

”We expect that inflation will fall within the target range in August 2009, but will move out again mainly due to technical factors relating to the sharp drop in oil prices this year.”

By mid 2010 Nedbank expects inflation to be firmly back in the central bank’s target range of 3% to 6%.

”The drop in inflation could be steeper than anticipated, particularly if the global downturn proves to be more protracted, putting further downward pressure on international prices.”

A sharper-than-expected domestic downturn would also weigh heavily on prices, as retailers would be forced to cut prices in order to clear stock, Nedbank said.

The rand still held some upside risk, but it was unlikely to fundamentally alter the inflation outlook.

”The impact on inflation will depend on how much of any cost increases will be passed on to consumers.

”With domestic demand very weak and likely to worsen further, retailers may have little pricing power and global prices may fall further to compensate.” — Sapa