Inflation dip points to reprieve for stretched consumers

SA’s suffering consumers may be set for a reprieve after inflation moderated more than economists expected in September, strengthening the argument for the SA Reserve Bank to join the move globally towards lower interest rates.

Increases in consumer prices, as measured by the annual change in the consumer price index (CPI), slowed to 4.1% in September, below the midpoint of the central bank’s 3% to 6% target range. The median forecast of 16 economists in a Bloomberg survey was for the rate to stay unchanged at 4.3%.

The Bank, which next decides on the repo rate in November, has come under some fire from elements in the governing ANC alliance for not loosening monetary policy to support an economy that it forecast will grow just 0.6% in 2019.

Detractors have accused governor Lesetja Kganyago of not paying sufficient attention to the part of its mandate that compels it to promote sustainable and balanced growth.

They argue that looser monetary policy is needed if the country is to have a chance to support businesses and make a dent to an unemployment rate of almost 30%.

“We continue to seem to undershoot on inflation and with that you’re likely to have low inflation expectations, and it becomes more likely that the Bank may cut,” said Dennis Dykes, Nedbank’s chief economist. “That is why the latest figure strengthens the case for a cut.”

The market reaction was muted, with the yield on the country’s 10-year bonds flat at 8.9%. The rand declined against the dollar for the first time in five days, falling 0.4% to R14.6486/$, according to Bloomberg data. It was also down 0.4% at R16.2882/€.

Lower interest rates typically weaken the currency by reducing the yield advantage that investors get for holding assets denominated in the rand.

Inflation has been within the Bank’s target range for 30 months, prompting some economists to argue that a weak economy and lack of consumer demand, as evidenced by the dismal performance of JSElisted retailers, mean there is room for it to cut rates further.

The Bank reduced the repo rate 25-basis points in July, effectively reversing an increase from November 2018. The US Federal Reserve cut its target rate in July and the European Central Bank resumed asset purchases, or quantitative easing.

The Bank also stayed put as global uncertainty caused by the US-China trade war whipsawed the rand and concerns about the country’s fiscal position have put pressure on the

country’s bonds, constraining the ability to drop rates without sparking a rise in yields to compensate investors for the higher risk of holding them.

Capital Economics senior emerging-markets economist John Ashbourne said that inflation is likely to pick up and the Bank may have missed out on its opportunity to cut rates.

“SA policymakers are quite hawkish and would want to see inflation anchored near the middle of the target range for several months.”

Stats SA said food and nonalcoholic beverages, housing and transport have had the biggest effect in keeping the inflation rate at modest levels.

At its last meeting, the Bank forecast that inflation would average 4.2% in 2019, while its quarterly projection model showed that the repo rate would be unchanged for the rest of the year.

4.2% The Reserve Bank’s forecast for average inflation in 2019