Consumer inflation slid lower in October, reaching its lowest level in eight years, Stats SA said on Wednesday.

Growth in consumer prices, as measured by the annual change in the consumer price index (CPI), slowed to 3.7% in October, down from 4.1% in September. The last time it hit levels this low was in February 2011, the agency said. The reading was below the median expectations of 3.9%, as measured by Bloomberg.

The slowdown was largely driven by declines in fuel prices, which fell 4.9% between October 2019 and the same month in 2018, said Stats SA.

The main contributors to inflation were increases in food and nonalcoholic beverages with annual inflation at 3.6%, housing and utilities at 4.8%, and miscellaneous goods and services at 5.7%. On a month-on-month basis CPI remained unchanged 

The level of the slow down could bolster further arguments for an interest-rate cut. Headline inflation has been sitting at or below the 4.5% midpoint of the SA Reserve Bank’s target range for all of 2019.

But ahead of the release of the inflation numbers most economists were not expecting the bank to announce a cut after its monetary policy committee (MPC) meeting on Thursday.

The economy is expected to grow by only 0.6% in 2019, weighed down by dismal business confidence, rising joblessness and poor income growth, but the threat of further credit ratings downgrades is expected to stay the Bank’s hand.

The majority of economists polled by Bloomberg are expecting the Bank to keep the repo rate on hold at 6.5%.

The looming risk of further negative credit rating actions in the next six months “will probably convince the [Reserve Bank] to rather stay conservative, similar to the outcome of the September meeting”, Elize Kruger, senior economist at NKC African Economics, said in a recent note.

After a dismal medium-term budget policy statement (MTBPS) in October, which outlined a severe deterioration in SA’s fiscal position, ratings agency Moody’s changed its outlook on the country’s credit rating from stable to negative.

Moody’s is the last ratings agency to class SA debt at investment grade. In announcing the outlook change Moody’s effectively gave the government until February’s budget to improve SA’s fiscal position or face a downgrade.

Inflation has dropped to an 8 year low but will this be enough to prompt the SARB to cut interest rates? Business Day TV spoke to Reezwana Sumad from Nedbank CIB to find out.

Fellow ratings agency S&P Global is expected to announce its ratings review on Friday. It cut SA’s rating to junk in 2017, but has its outlook for the country at stable.

The agency’s MD for Sub-Saharan Africa, Konrad Reuss, recently sounded warnings of further risks to the rating, given the negative medium-term budget outcome and “very little action” outlined to halt the decline.

Reserve Bank governor Lesetja Kganyago has, meanwhile, repeatedly referenced the difficulty that deteriorating state finances poses for monetary policy and the need for structural reforms to improve economic growth.

In the bank’s most recent monetary policy review it warned of the threat that deteriorating fiscal circumstances, particularly through bailouts for ailing parastatals posed to the economy. These fiscal risks, it warned, are hampering the ability of monetary policy to support growth, the Bank said.


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