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Thursday Aug 24, 2017

Interest rate cut on the cards

South Africa's headline inflation eased to a 20 month low year-on-year in July, raising the prospect that the SA Reserve Bank (Sarb) could lower interest rates further in the coming months.

Figures released yesterday by Statistics South Africa (StatsSA) showed that inflation fell to 4.6 percent in July from 5.1 percent year-on-year in June on the back of the slowdown in the cost of food, electricity and fuel prices.

StatsSA said while food prices rose marginally 0.3 percent month-on-month terms in July 2017, the bread and cereals component continued to decline to levels last seen in 2010.

However, meat prices ticked higher to 14.4 percent year-onyear lifted by the supply-demand imbalance that emanated from more herds having been culled during last year's drought inching meat prices higher.

John Ashbourne, an Africa economist at Capital Economics, said the decelerating inflation supported the view that Sarb could cut its key policy rate further this year.

"Indeed, risks to our once non-consensus view are now weighted to the downside. The string of weaker inflation figures suggests an increasing chance that policymakers will cut at both the September and November meetings, taking the rate to 6 percent by year end," Ashbourne said.

StatsSA said the core inflation, which excludes the cost of food, non-alcoholic beverages, petrol, and energy fell to 4.7 percent in July of 2017 from 4.8 percent in each of the previous three months, reaching the lowest since January of 2013.

Mamello Matikinca, a senior economist at FNB, said while the risk to the inflation outlook remained from the volatile exchange rate remain, headline inflation was expected to anchor around the midpoint of the inflation target band for some time.

"As such we continue to believe the reserve bank will ease policy rates further this year," Matikinca said. However, the interest rate cutting cycle is expected to remain "shallow and brief ".

Last month Sarb's Monetary Policy Committee took the market by surprise, cutting the benchmark rate by 25 basis points to 6.75 percent for the first time in five years.

The central bank's governor Lesetja Kganyago highlighted an improving inflation outlook and deteriorating growth as key considerations for the interest rate cut.

However, the bank warned that risks to the inflation outlook remained. Sarb predicted that the inflation would average 5.3 percent this year, 4.9 percent next year and 5.2 percent in 2019.

Sanisha Packirisamy, an economist at MMI Investments, said that given the lingering risk of further ratings downgrades and ongoing political uncertainty, potential negative swings in emerging market sentiment and uncomfortably high domestic inflation expectations would make the monetary regime to be comparatively shallow relative to previous cycles.

"Should inflation continue to track lower in line with expectations and remain well within the target band for the foreseeable future, it is likely that the Sarb will respond by cutting interest rates further by an additional 50 basis points by the end of the first quarter of 2018."

"The timing of the two additional interest rate hikes will likely depend on currency moves, in reaction to a potential rise in global risk aversion and domestic political developments," Packirisamy said.

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