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Inflation slows more than expected

Jun 20 2012 10:45 Reuters

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Johannesburg - South Africa's consumer inflation braked more than expected to 5.7% year-on-year (y/y) in May from 6.1% in April, returning to the Reserve Bank's 3%- 6% target band, Statistics South Africa said on Wednesday. 

On a month-on-month basis inflation also surprised to the downside, easing to 0.1% compared to 0.4% in April.

Economists in a Reuters poll had expected the consumer price index to ease to 5.95% on a y/y basis and prices to remain unchanged at 0.4% on a monthly basis.

Elna Moolman, an economist at Renaissance Capital said: “The downside was somewhat broad-based, although dominated by lower food inflation and particularly meat prices that continued to fall.

“For now my view is that interest rates will remain flat for the remainder of this year and through next year.

“There is a small chance of further monetary easing, but I believe it would require further deterioration in global growth prospects.”

Said Christie Viljoen of NKC economists: “I like the headline number. It’s low and that’s always very good. It’s the lowest since September of last year.

“The month-on-month number especially is surprisingly low. That’s the lowest since November 2010 which was the last time the Reserve Bank adjusted the interest rate, which was down.

“This will fuel talk about a possible interest rate cut this year.”

Market reaction

The rand firmed to R8.22 against the dollar from R8.23 before the data was released at 08:00 GMT. The yield on the 2026 bond briefly dropped 2.5 basis points to 7.985%, before going back to 8.01% by 08:13 GMT.

The 2015 bond was at 6.03% from 6.045% prior to the announcement.

The South African Reserve Bank targets a 3%-6% band for headline consumer inflation. The price index returned to the band in March after being outside it since November last year. It breached the top end of the range again in April.

The Bank expects inflation to average 6% in the second quarter of this year and then gradually moderate within the target range.

Reserve Bank governor Gill Marcus said earlier this month the depreciating rand exchange rate, which dropped to a three-year low of R8.71/dollar at the start of June, posed the main upside risk to the bank’s inflation outlook.

The market has started talking about the possibility of monetary easing taking place sooner than previous expectations, as inflation moderates and economic growth struggles to gain traction.

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