Sharp decline in September inflation back to within the inflation target
- September inflation fell to within the official inflation target for the first time since February, falling by no less than -0.5%, to 5.9%, from 6.4% in August. This was a 0.2% better drop than had been anticipated.
- The biggest contributor to the decline in inflation was, as expected, the fall in the y-o-y rate of inflation of petrol arising from the -67 cl reduction in the petrol price. However, also as expected, food inflation tempered sharply, on the back of the decline in food commodity prices earlier this year. In addition, the benefits of Rand stabilisation were manifested in the form of declining inflation of many import intensive goods, including furniture and appliances, vehicles, recreational equipment and books.
- The bigger than expected decline in inflation will undoubtedly ease pressures on the Reserve Bank to raise interest rates further in the short term. One cannot rule out the possibility of a rate hike at the November MPC meeting because the Bank has stated categorically that it would like to restore interest rates to levels above inflation. However, especially with so-called "core" inflation (i.e. inflation excluding volatile food and petrol components) falling, the probability of such a rate hike this year has now diminished to substantially less than 50%.
- Lower than expected inflation also implies a marginal boost to growth in disposable income which should stabilise economic activity and consumer spending at low positive levels as opposed to contemplating a further deterioration.
Inflation falls back to within target for first time since February
For several months between about May and mid-September, we had been suggesting that inflation would decline quite steeply in ensuing months and would probably fall back to within the 3% to 6% inflation target long before the end of the year. Our view was derived from recognition of the sharp fall in commodity prices, especially of oil and food, as well as the recovery and stabilisation of the Rand's exchange rate following its steep declines back in January. With inflation peaking in line with our expectations in May at 6.63% and declining in the ensuing two months to 6.3% in July, it looked as if our forecast for this indicator was turning out to be correct. However, such optimism on the inflation outlook was dealt a blow last month by reports of an unexpected increase in inflation for August. Contrary to our expectations of inflation declining from July's 6.3%, to about 6.1% in August, it in fact rose to 6.4%.
Fortunately, the September CPI figures just published suggest the unexpected jump in August inflation was an aberration within an overall declining trend and that our initial take on the likely trend of inflation was the right one after all. September's inflation rate fell by a full -0.5%, to 5.9%, the first time since February that inflation was back within the official inflation target. This outcome was significantly lower than consensus forecasts which had inflation declining to 6.1% in September, i.e. by 0.2% less than had been expected.
Probability of November rate hike definitely reduced
With inflation declining back to within the inflation target sooner than anticipated by the Reserve Bank, there is now undoubtedly a reduction in the probability of the Bank going ahead with another interest rate hike at its November MPC meeting. Of course, there are still the October inflation figures to be released prior to the MPC meeting, which could again possibly reverse the optimism derived from this latest news.
On the whole, however, the Bank might find it difficult to justify raising interest rates in the short term in the face of such positive information on the trend of inflation. At the same time, we recognise that the Reserve Bank has been fairly outspoken about wanting to maintain a rising trend of interest rates in order to "normalise" the level of interest rates. We have interpreted this to mean that the Bank is keen on bringing interest rates back to levels above inflation as soon as possible in order to encourage savings and reduce distortions in the economy. In addition, newly appointed Reserve Bank Governor Lesetja Kganyago might be keen to impose his foot print as a strong Governor of the institution by going ahead with the rising interest rate cycle which the bank has been intimating it intends to pursue. In other words, there still remains a reasonable possibility of a rate hike in November.
Source: Engineering News