Big rate cut expected as inflation plummets

SA’s main inflation rates dived more steeply than expected last month, driven by a sharp fall in fuel prices and backing the case for a full percentage point cut in interest rates next week.
The annual rise in the CPIX inflation gauge targeted for monetary policy eased to 10,3% from 12,1% in November — its lowest in nine months — official data showed yesterday.

The headline consumer price index (CPI) — which will replace CPIX as the official inflation target this year — slowed to 9,5% from 11,8% in November.

Government bonds and banking shares rallied on the news, which fanned speculation the Reserve Bank will cut rates aggressively this year, in a bid to keep SA’s flagging economy out of the global recession.

“The call is still a close one, but we now expect the Bank to cut the repo rate by 100 basis points next week,” said Cadiz economist Adenaan Hardien.

“Inflation has surprised on the downside, and the real economic data remains dismal, with significant risk of a technical recession early in 2009.”

During the month, CPI plunged 1,1% and CPIX 0,9%, both the biggest falls on record, the official data showed.

Absa Capital economist Monale Ratsoma said the Bank’s monetary policy committee (MPC) was likely to focus on “the magnitude” of the cut in its repo rate, which is now at 11,5% .

At its December meeting, two of the MPC’s seven members argued for a full percentage point rate cut, but in the end they settled on half a percentage point. That marked the start of an easing cycle in local interest rates, which climbed by five percentage points between June 2006 and last June as the Bank fought soaring inflation. Since then, fallout from the global financial crisis has pushed most developed economies into what looks set to be the worst downturn since the Great Depression eight decades ago.

SA has been relatively shielded so far due to its sound banking system and lack of exposure to “toxic” financial instruments that toppled several big international banks. But a steep plunge in prices for commodities that make up more than 60% of SA’s exports, and slowing domestic demand, already curbed growth to 0,2%, a decade low.

Three of the economy’s key sectors — manufacturing, retail and mining — are in a recession, which is defined as two successive quarters of contraction .

That has fanned fears of widespread job cuts, which a United Nations agency warned yesterday could amount to 51-million worldwide this year.

“The growth outlook and job losses are likely to be a major discussion point at next week’s MPC meeting,” said Investec economist Kgotso Radira.

“We are expecting an interest rate cut of 100 basis points.”

Stanlib economist Kevin Lings anticipates a total of 250000 jobs to be shed during SA’s economic downturn, which he expects to last for 12-18 months. About a third of those cuts have already happened, in the third quarter of last year.

The Bank has scope to ease monetary policy decisively now as inflation is expected to return to its official 3%-6% target range by the middle of this year, after breaching it since April 2007.

Plunging fuel prices and an overhaul of goods and services in Statistic SA’s consumer price baskets are driving the benign short-term outlook. Inflation is expected to fall by up to three percentage points this month.

Article from: www.businessday.co.za