Low inflation may not herald lower rates
• Stats SA based April number on limited sample as it had to adjust its CPI collection methods
The slowdown in SA’s inflation to the lower end of the Reserve Bank’s target range probably will not be enough to entice the Bank to cut interest rates that are already at a record low, say economists at Nedbank. The rate of change in the consumer price index slowed to 3% in April, the lowest since hitting 2.8% in June 2005, according to Statistics SA data released on Wednesday.
The slowdown in SA’s inflation to the lower end of the Reserve Bank’s target range probably won’t be enough to entice the Bank to cut interest rates that are already at a record low, according to economists at Nedbank.
The rate of change in the consumer price index slowed to 3% in April, the lowest since hitting 2.8% in June 2005, according to Statistics SA figures released on Wednesday. It was the first monthly reading reflecting the effects of the national lockdown, which left all but the most essential goods out of sale, while restrictions on movements restricted fieldwork.
While consumer-price growth is likely to slow further, the central bank, which has reduced the repo rate by 275 basis points to the lowest on record, has anticipated this already, and is unlikely to move unless inflation dips significantly below 3% or the GDP contraction is worse than it’s 7% forecast, the Nedbank economic team said in a research note.
“Inflation will have to decline significantly below 3% for the Bank to cut rates again this year. Growth will also have to disappoint to below the -7% the Bank forecast for 2020 to justify further cuts. For this reason, our base case is for rates to remain on hold for the remainder of the year,” they said.
April’s data could still add to calls for the Bank to cut interest rates and expand unconventional measures such as bond buying to aid an economy that’s set for its deepest recession since at least the early 1930s. Alongside slashing the repo rate to 3.75%, the Bank has taken several steps to ease liquidity pressure in local markets, including buying government bonds from commercial lenders and money managers, upping its holdings by R22.7bn at the end of May.
At its May meeting, the central bank said that it expected inflation to average 3.4% for 2020, before moving to 4.4%, near the midpoint of the 3% to 6% target range.
Governor Lesetja Kganyago and the head of economic research, Chris Loewald, have previously signalled that policymakers would look through a temporary breach of the bottom end of the target, which they expect in the last two quarters of 2020.
Momentum analysts Herman van Papendorp and Sanisha Packirisamy said they expected inflation to dip to 2% and GDP to shrink about 8% in 2020, creating room for a “modest” easing of 50 basis points in the repo rate.
Stats SA said it had to make significant adjustments to its CPI collection methods because of the lockdown, and as a result the April number was based on a “significantly limited sample”.
Prices for altogether 171 products, equivalent to 20% of the weight of the CPI basket, were collected online.
Indices where products were not available for sale have been imputed, or estimated, using the headline inflation rate, the agency said. These indices represent about 26.5% of the weight of the CPI basket.