Rate cut hopes rise on inflation

Johannesburg - Fears of an interest rate hike faded and hopes of a cut resurfaced after the CPIX rate for September fell to 13% from August's record high level of 13.6%. The better-than-expected inflation figures followed credit data that also augured well for interest rate cuts.

"I'm pleasantly surprised. These figures confirm that the inflation beast is finally coming to rest. The decline in inflation will help contain inflationary expectations that have been negatively affected by the weak rand," Standard Bank economist Danelee van Dyk said. She predicted interest rates would remain on hold until April, when the first of four 50 basis point cuts was expected.

Fears arose last week that interest rates might rise because the rand nosedived against major currencies. However, the local unit has staged a comeback, though it was still trading at R10.32/dollar earlier on Wednesday.

Van Dyk said if August was the peak in inflation and the downward trend was maintained, this would augur particularly well for inflation next year.

Inflation is expected to fall by about two percentage points in January next year when the consumer price index (CPI) is rebased and reweighted. The CPI replaces the CPIX as the targeted measure of inflation from next year.

Van Dyk believed the weak rand wouldn't have a substantial effect on inflation, as commodities prices such as oil had also fallen, offsetting the effect of the rand.

ETM economist Russell Lamberti also expected an interest rate cut in April next year after the release of encouraging inflation and credit data.

Good news for those hoping for an early interest rate cut came from the release of credit growth and money supply figures. The figures show that consumers are feeling the pinch of higher interest rates, and that their credit binge is at an end.

Growth in private sector credit - a key indicator for the Reserve Bank - fell significantly to 16.42% in September from 18.64% in August. The September growth rate was well below consensus expectations.

Stanlib economist Kevin Lings said there was evidence that increases in interest rates, the introduction of the National Credit Act, a slump in disposable income growth, a slowdown in housing price growth and worsening consumer confidence were all having a moderating impact on overall demand for credit.

The Reserve Bank has raised the repo rate by five percentage points since June 2006, bringing the prime overdraft rate to 15.5%.

The Reserve Bank said in its last monetary policy committee (MPC) statement that the Bank expected inflation to peak at 13.3% in the third quarter of this year and to average 6.9% in 2009 after a significant decline in the first quarter of 2009.

The bank expected consumer inflation to return to the target in only the second quarter of 2010 and to reach a level of 5.5% in the final quarter of that year.

Finance Minister Trevor Manuel is more optimistic about inflation, saying in his mini-budget speech that he expected that the CPI rate will fall into the target band in the third quarter of 2009. Rand Merchant Bank expected the CPI rate to fall below 6% in April 2010.