South Africa: Inflation Ticks Down to Middle of Target Band

Windhoek - Analysts at Deutsche Bank said the latest inflation reading for South Africa surprised the market by coming in well below consenus.

"Inflation came in at 4.2% yoy well below consensus of 4.5% and our more bullish forecast of 4.3% yoy. This is the first time since November 2006 that inflation has re-entered the bottom half of the 3 to 6% inflation target band", said Ashok Bhundia, a researcher in Deutsche Bank's Fixed Income division.

Food inflation fell once again to 0.7% yoy (from 0.8% the previous month). A big contribution to the decline in headline inflation came from a 16.8% drop in motor vehicle insurance which drove the annual rate of inflation for miscellaneous good and services (weight 13.56%) down to 7.4% yoy from 8.6% in May.

Bhundia said the impact of the World Cup is generally muted considering that hotels have a small weight in the basket: although hotel prices (weight 0.93%) increased by 17.6% mom, restaurant prices (weight 1.85%) increased by a modest 0.3% mom, and airfares (weight 0.27%) actually fell by 3.3% mom.

Goods inflation continues to trend down. Goods inflation which is more responsive to exchange rate developments than services inflation dropped to 2.6% (from 3.1% yoy in May). Services inflation fell to 6.1% yoy from 6.4% yoy the previous month and is therefore on the verge of re-entering the target band for the first time since November 2006. "This has been part of the CPI basket that has proved sticky with the annual rate of inflation coming down only very gradually over the last 12 months."

The research team at Deutsche is of the opinion that underlying inflationary pressures continue to fall. "Our preferred measure of core inflation, (CPI excluding food/non alcoholic beverages, petrol and energy) fell to 4.2% yoy. This is the clearest indication that underlying inflation momentum is subdued and continues to decline - in technical terms, this is the portion of the basket which is most responsive to monetary policy since it excludes a number of important supply side factors that are exogenous forces impacting inflation and not sensitive to monetary policy"

Bhundia said the June inflation reading provides more opportunity for the Reserve Bank to cut the repo rate at its next meeting but this will depend on consumer spending and commercial expansion. Deutsche Bank has maintained the position, since February this year, that inflation trend merits another interest rate drop from 6.5% to 6%. However, last week the Monetary Policy Committee of the South African Reserve Bank decided to keep rates on hold for another term.

Original Source:
Original date published: 30 July 2010

Source Url: http://allafrica.com/stories/201007300830.html?viewall=1

Posted By: News Poster
.