SA inflation up slightly, jury out on rates

| Friday November 26, 2010 00:00

Statistics South Africa said on Wednesday headline CPI stood at 3,4 percent year-on-year in October, compared with a five-year low of 3,2 percent in September and slightly above a consensus of 3,3 percent in a Reuters poll.

On a monthly basis, CPI was at 0,2 percent, from 0,1 percent in September. The market was expecting 0,1 percent.

The central bank lowered its inflation forecasts last week and said inflation should average 4,3 percent this year and next, rising to 4,8 percent in 2012.

The benign inflation outlook gave the South African Reserve Bank room to cut the repo rate further by 50 basis points to 5,5 percent, adding to 600 basis points worth of reductions since December 2008. Razia Khan, head of Africa Research at Standard Chartered, said inflation may edge up in the next few months and there may not be need for further rate cuts.

'With inflation expected to drift up gradually from the very low end of the inflation targeting band ... we do not expect that the SARB will need to cut interest rates again in this cycle,' Khan said.

'That said, they have left the door to further easing open, and in case of any renewed deterioration in the macroeconomic data, they will act again. For now, it's a possibility, not a core scenario,' she said. The Reserve Bank last week painted a bleak economic outlook and weak GDP numbers released on Tuesday reinforced its decision. Other analysts said rates could fall further as CPI was expected to remain inside the central bank's 3 to 6 percent target band in the medium term, and the economy was still sluggish.

'I think inflationary pressures are generally subdued still, even with CPI being a bit higher,' said Colen Garrow, economist at Brait.

'So, I think broadly there is still encouragement for the Reserve Bank to ease monetary policy,' he added.-(Reuters)