Inflation rules out rate cut

Johannesburg - Inflation continued its downwards march towards the South African Reserve Bank's (Sarb's) target, falling to 6.7% in July from 6.9% in June. This was slightly worse than expected, with economists saying the number wouldn't trigger a cut in interest rates.

Inflation has been outside Sarb's target range of 3% to 6% for 29 months. The inflation rate peaked at 13.6% in August 2008 before falling rapidly, driven mainly by the base effects as last year's high month-on-month increases fell out of the calculation.

However, the inflation rate hasn't fallen as rapidly as was hoped about a year ago. Standard Bank economist Danelee van Dyk said inflation had been rigid on the way down.

"These numbers are unlikely to have an impact on interest rate decisions. We will have to wait and see what happens in coming months. It's possible that inflation could test 6% in October and that could have positive repercussions for interest rates," Van Dyk said.

However, she warned that if inflation did hit the target in 2009, it was likely to go back up again for some months as the positive base effects fell away and the petrol price exerted upward pressure.

Mike Schüssler, director at Economists.co.za, said the inflation environment gave no cause for further interest rate reductions. Inflation might fall for another month or two, he said, but would then rise briefly again.

Though it would go into the target range in 2010, it would probably start rising again in about a year's time. "We should guard against having negative real interest rates, because this hits the savers in our economy. Those calling for interest rate cuts forget that we are a savings-poor economy," he said.

ETM economist George Glynos said the inflation figure for July wasn't good enough to motivate a cut in rates, as inflation had been above the consensus forecast of 6.6%.

"We need to see a few months of the inflation rate being below market consensus before the case can be made for another cut in interest rates." Glynos expected the inflation rate to bounce off the top of the target this year before entering the target range in the first quarter of 2010.

The Reserve Bank started cutting interest rates in December, as it moved its focus away from inflation towards the recession and it also became clear that inflation would fall.

Sarb has cut interest rates by an aggressive five percentage points, bringing the prime overdraft rate to 10.5%. It expected inflation to enter the target range in the second quarter of 2010 and to stay there until the end of 2011.

- Fin24.com