Inflation edges closer to target

Johannesburg - South Africa's targeted consumer inflation most probably slowed in September, drawing closer to the central bank's target band, a survey showed on Friday, but pressures lurk from higher power costs.

South Africa's central bank left its key repo rate unchanged on Thursday, in line with market expectations, worried mainly by the likely inflationary impact of anticipated large electricity tariff increases.

Announcing the decision, outgoing South African Reserve Bank (Sarb) Governor Tito Mboweni said substantial increases requested by state power utility Eskom were the main long-term threat to the inflation outlook.

The median consensus from a Reuters poll of 16 economists was that the main CPI gauge decelerated to 6.2% year-on-year in September from 6.4% in August, leaving it just slightly above the top end of a 3% to 6% percent target band first breached in April 2007.

Eskom has asked for price increases of at least 45% a year for the next three years, adding to the 31% jump awarded this year to fund a drive to boost capacity.

"This poses a formidable threat to the longer-term inflation outlook, as the increase could triple the price of electricity by 2012," Moody's Economy.com said in a note.

"Although annual consumer price inflation is expected to ease into 2010, South Africa's monetary authorities will likely maintain a cautious stance," it added.

The Reserve Bank lifted interest rates by a cumulative 500 basis points between June 2006 and June 2008 to tame inflation, before reversing them in an winding cycle between December 2008 and August 2009.

It has, however, left the key repo rate unchanged at 7.0% at the last two policy meetings, as inflation remains a worry and the economy shows tentative signs of emerging out of its first recession in 17 years.

The Reuters poll showed producer inflation should remain in negative territory, falling 2.7% in the year to September compared to -4.0% in August.

Annual growth in private sector credit extension, which has come down sharply as consumers grapple with recession and stricter lending regulations, was seen slowing to 2.25% year-on-year in September, from 2.34%.

"Even anecdotal evidence that banks are beginning to ease lending standards is unlikely to make much difference to the overall credit data just yet. Credit growth remains very subdued," said Razia Khan, Africa head of research at Standard Chartered in London.

Only 6 of the economists polled gave forecasts for the trade balance, a volatile number which is traditionally hard to predict, with consensus coming out at a deficit of R800m, better than the August shortfall of R1.98bn.

- Reuters