Inflation below midpoint of target strengthens case for Bank rate cut
Lockdown regulations have complicated the collection of upcoming consumer price inflation data, Stats SA says
Inflation slowed to within the mid point of the Reserve Bank's target range for the first time in 2020, starting a reversal trend that may give it space to add to interest rate cut relief it has already given the Covid-19 ravaged economy.
The rate of change in the consumer price index slowed to 4.1% in March, the lowest level since December. February's 4.6% was the highest since November 2018, according to Stats SA data released on Wednesday. On a month-on-month basis, prices rose just 0.3%, compared with 1% in February.
Sharp slowdowns were seen in the annual changes on fuel prices under the transport component - with fuel prices slowing from 12.7% in February to 5.5% in March, the data showed.
That trend that will probably continue after oil prices resumed their slump this week, with US futures dropping below zero for the first time. The dramatic fall in international oil prices is expected to feed into lower fuel costs for SA, despite the weakness SA’s currency has taken amid global financial market turmoil.
"Given the speed at which the local and global environment is changing at present, it is not impossible for the Bank to make another big rate cut" of more than 25 basis points "in the near future", PwC economists Lullu Krugel and Christie Viljoen wrote in a client note .
The Bank has already dramatically cut interest rates in recent weeks — slashing the repo rate by 100 basis points each at meeting in March and April, bringing it to 4.25%, the lowest since it was introduced in 1998.
Future cuts may be smaller because the Bank may not want to see rates go negative, or lower than the inflation rate, economists said. Negative rates would risk worsening the selloff in rand, which is down about 25%, by making SA assets even less appealing at a time of general risk aversion.
In its statement released after its unscheduled meeting on April 14, the monetary policy committee said it expected inflation to average 3.6% in 2020 and that overall risks to that outlook "at this time appear to be to the downside." For its forecast, the MPC assumed Brent crude averaging $42 per barrel in 2020. Prices dropped to 21-year lows at just below $16.24 on Wednesday, before trading at just above $20.
It's not a foregone conclusion that the benign inflation outlook will cause the Bank to cut rates aggressively given the prospect of real interest rates turning negative, said Nedbank economists.
"Our view is that the Bank probably does not have the appetite for negative real rates, so our forecast is for a another cut in rates at the May meeting, but less aggressively than the previous two cuts of 100 basis points each," they said.
March’s data was collected before the Covid-19 lockdown on March 27.
According to Stats SA, the regulations, which are in effect until the beginning of May, are likely to complicate the production of data for April.
The lockdown has restricted the goods and services consumers can buy and prevented data collectors from visiting stores, the agency said.
“Where possible, prices are being collected in April from the online presence of stores already in the CPI sample,” it said. “Indices of products not available for purchase during this period will be imputed.”
Stats SA said that specific details related to the April CPI will be communicated closer to the date of its release.
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