/ 23 January 2009

SA inflation seen sharply lower in December

South Africa’s targeted consumer price inflation likely decelerated sharply in December on cooling demand, hardening chances of steep interest rate cuts this year to help boost growth, a Reuters poll showed on Friday.

Annual CPIX (consumer inflation less mortgage costs) — which will be replaced as the central bank’s targeted measure from January — remains way above the top end of a 3% to 6% percent band, but has been on a downward trajectory since September 2008.

The South African Reserve Bank lifted interest rates by a cumulative 500 basis points between June 2006 and June 2008 to rein in inflation, but began unwinding the hikes with a 50-basis-points cut in December on signs high rates were stifling spending, and on forecasts of lower inflation.

Analysts expect more cuts in the repo rate from the current 11,5%, with the next decision on February 5.

The Reuters poll of 19 economists reached consensus on CPIX, to be released on Wednesday, braking further to 10,4% in the year to December from 12,1% in November, which will bring the gauge to its lowest level since April last year.

The fall, partly due to an 18% cut in petrol prices during the month, raises the chances the central bank will abandon its recent practice of gradual rate changes, with a bigger-than-usual move to a 100-basis-point cut.

”We expect a further retreat in CPIX inflation … in December 2008. From here, we expect CPIX inflation to moderate to around 7,1% in January and then to sub-6% by around May,” said Barnard Jacobs Mellet economist Elna Moolman.

Headline CPI, which will replace CPIX as the targeted inflation number from the January 2009 release, should also slow considerably to 9,9% in the year to December from 11,8% the previous month.

Switching to headline CPI
Statistics South Africa has re-weighted the headline number, with food, a key driver of higher inflation, now accounting for 18% of the price basket compared with 26% before.

This was expected to lead to another big drop in inflation for January. The new basket also changes the way housing costs are calculated.

Analysts say the argument for an aggressive rate cut next month received a boost this week from data showing South Africa’s retail sales fell by 4% year-on-year in November, a further sign the economy is under strain.

The Treasury has forecast growth will slow further to 3% this year from an estimated 3,7% in 2008, compared with an average 5% over the previous four years.

Some economists say the forecast is too optimistic.

”Everything is now falling into place for aggressive easing from the South African Reserve Bank [SARB],” Razia Khan, head of research for Africa at London-based Standard Chartered, said.

”We now expect the SARB to cut by 100 basis points at each of its meetings in February and April 2009, with more easing to follow.”

But Moolman warned that a sharp depreciation in the rand currency posed an upside risk to inflation.

The unit lost more than 30% percent of its value against the United States dollar in 2008, and remains under pressure as a global financial crisis keeps investors wary of risk.

The Reuters poll showed producer price inflation, which feeds into the consumer number, should also come in lower at 11,4% in December from 12,6%, as a drop in oil prices offers relief to manufacturers.

Annual growth in private sector credit extension (PSCE), which has come down steadily over the past year in response to higher rates, should, however, remain almost unchanged at 15,4% year-on-year in December, compared with 15,3%.

The trade deficit, also for December, was seen narrower at R4,5-billion. — Reuters