Rate cut hopes fade away

Johannesburg - The Reserve Bank's new targeted measure of inflation, the CPI rate, came in higher than expected at 8.1% in January, dealing a blow to hopes of an emergency interest rate cut this week or next week.

The CPI rate in January was sharply lower than the last CPIX rate - previously targeted by the Reserve Bank - which came in at 10.3% in December. However, the January drop was not as sharp as economists had predicted, given the large petrol price fall in the month. Expectations were for a CPI rate of 7.3%.

The inflation figures followed the release of worse-than-expected gross domestic product (GDP) figures, which showed the economy shrinking 1.8% in the fourth quarter of 2008. In the light of hints earlier in February by Reserve Bank governor Tito Mboweni, the GDP data sparked speculation of an emergency meeting of the monetary policy committee to cut the repo rate by 100 basis points.

However, some economists said there wouldn't be an emergency meeting. Standard Bank economist Danelee van Dyk said she had expected a relatively high inflation number, given the behaviour of food prices.

Food, though now weighted lower in the basket, still has a big effect on the rate. She said food price rises month-on-month of about 2% were high. Another category showing increases was vehicle prices.

"If one excludes petrol from the inflation rate, it would be at 9.1%. This shows there are still general price pressures in the system. This doesn't warrant any emergency action.

"But inflation remains on track to fall within the target range as early as the second quarter of this year. This will justify interest rate cuts of 100 basis points each in April and June," Van Dyk said.

ETM economist George Glynos described the figures as "an unpleasant surprise". He said this affected expectations of inflation moderation. "The basis for an emergency cut has weakened, despite the bad GDP figure. The Reserve Bank has to be careful not to be seen to be moving away from its anti-inflation mandate."

Nedbank economist Dennis Dykes said there was still a chance of an emergency rate cut, especially given that the economic data and the climate would get worse in future. The Reserve Bank had to take into account what was happening now - Dykes believed this meant weak economic conditions - and not just the historical GDP data. He expected the prime overdraft rate to be 10.5%, "possibly even 9.5%", by year-end from a current 14%.

The new targeted inflation rate is CPI, and no longer CPIX. CPIX inflation broke through the Reserve Bank's 3%-6% target range for CPIX inflation - the consumer inflation rate excluding mortgage interest rates - in April 2007. Driven by high food, fuel and electricity prices, CPIX inflation hit a peak of 13.6% in August.

The Reserve Bank raised the repo rate by five percentage points between June 2006 and June 2008, bringing the prime overdraft rate to 15.5%. The bank then cut the repo rate by 50 basis points in December and a further 100 basis points in February.

Statistics SA earlier in February released the 2008 indices of the new CPI, which is based on a new basket with new weights for each item and a new base year.

The new basket includes items such as taxi fares which were not in the old basket, and excludes items such as cassettes, which have become obsolete.

- Fin24.com