Moody's: No more rate cuts

Johannesburg - Despite the pullback in consumer and food price inflation, further rate cuts are not expected, according to Moody's Economy.com.

In its weekly commentary, the analysts say: "Whilst the ongoing pullback in inflation has provided the South African Reserve Bank with more room to maneuver, further rate cuts are unlikely.

Notwithstanding its latest rate cut, the central bank is still wary of wage increases that are substantially above the rate of inflation.

"In addition, the housing and utilities component of the CPI, which makes up slightly more than a fifth of the index, remains a thorn in the SARB's side.

"The headline inflation rate would be lower had it not been for the double-digit growth of electricity costs. Underinvestment in previous years has led to electricity shortages, which were responsible for a 31% hike in electricity tariffs in July. This is harmful not only because it raises the cost of doing business, but because stubborn utility costs counteract the benefit of decreasing food prices for low-income earners, as they spend a larger proportion of their income on necessities."

According to Moody's Economy.com, consumer price inflation also continues to vary widely across provinces.

"Limpopo, Gauteng and Kwazulu-Natal, where about half of South Africans reside, experienced annual inflation rates of just over 6% in July. Meanwhile, inflation in the Eastern Cape and Mpumalanga was stickier, with the CPI rising over 7% y/y. In the Eastern Cape, the cost of water and other services soared 16.6% from June, nearly double the national rate. In Mpumalanga, electricity costs rose nearly 24% y/y, compared with the national average increase of 19%," the analysts point out.

According to Moody's Economy.com, curtailed domestic demand is expected to return the headline annual CPI rate to the SARB's 3% to 6% target range by the second half of next year.

"Prices for goods will respond to the pullback in consumer spending and spur further disinflation. The inflation rate for services, on the other hand, will persist because of the rigidity of administered prices for water, electricity and other services. Combined with large wage increases, higher energy and utility costs will keep inflation from falling more quickly," the analysts add.

- I-Net Bridge