October 29, 2003

By Vernon Wessels

Johannesburg - Consumer price inflation has slowed to within the Reserve Bank's target range for the first time in almost two years, boosting expectations that interest rates will be cut again in December.

The central bank's target measure, consumer price inflation excluding mortgage costs (CPIX), slowed to 5.4 percent on an annual basis in September from 6.3 percent in August, according to data released by Statistics SA yesterday.

The 3 percent to 6 percent target range, announced in 2000, was applied for the first time last year.

Economists said yesterday's numbers were in line with expectations and paved the way for the central bank to cut rates by a further 100 to 200 basis points by February.

The Reserve Bank has cut rates four times this year by a total 500 basis points, putting the repo rate at 8.5 percent. This means the prime lending rate has been cut to 12 percent, its lowest since August 1986.

CPIX last fell within the target band of 3 percent to 6 percent in August and September 2001, before a dramatic decline in the value of the rand sent inflation rocketing. A 36 percent appreciation by the rand against the dollar last year and a further 23 percent recovery against the beleaguered US currency this year have caused the prices of imported goods to drop and eased food prices.

The consumer price index (CPI), which measures headline inflation, decelerated to 3.7 percent in September from 5.1 percent in August. Tobacco product inflation slowed to 11 percent from 14.6 percent. The rate for medical care and health expenses decreased to 7.9 percent in September from 8.2 percent in August.

Food prices rose 4.2 percent in September compared with 6.2 percent in August, the Stats SA data showed.

Cees Bruggemans, chief economist at First National Bank, expected CPIX to bottom near 4 percent early next year, after which it would move sideways for a few months and then start to climb again.  

Low interest rates in the US and Europe should support rand strength as foreigners invested in high-yielding South African assets, which would keep the lid on inflation.

"This should maintain downward pressure on CPIX, possibly below 5 percent, especially if oil prices were not to rise and drought were not to impact on our food prices," Bruggemans said.

"With the Reserve Bank willing to 'experiment' and test the 'limits' of the economy's capability, interest rates may well be cut by another 1 percent in December [with] prime ending 2003 at 11 percent."

"A further 1 percent cut remains a possibility early in 2004, taking prime down to 10 percent," he added.

Marisa Fassler, an economist at JP Morgan, said there was more downside than upside risk to prices over the next few months.

"We see CPIX falling to 4.4 percent [on an annual basis] in October and only 4 percent in November, depending on the magnitude of petrol price cuts in November," she said.

This should make the Reserve Bank comfortable with a 100 basis point cut in December if the rand remained strong, Fassler said.

Johan Rossouw, the chief economist of Vector Securities, expected a 50 basis point cut in December.

"While forecast levels of inflation do suggest ample scope for further interest rate alleviation, the acceleration in underlying inflation will probably be slightly concerning to the monetary authorities.," he said.

Data to be released by Stats SA today are expected to show producer inflation decelerated by -0.4 percent last month from 0.2 percent in August, its lowest level yet.