Inflation drops below Reserve Bank target on the eve of interest rate decision
Inflation at 2.9% - hands up if you believe it!Bruce Whitfield, The Money Show host
South Africa's consumer inflation rate dipped below the Reserve Bank target range (3-6%) in February - the slowest acceleration since June 2020.
The news comes on the eve of the decision on interest rates to be announced by the Bank's monetary policy committee (MPC).
Ordinarily, an inflation rate of 2.9% in February would bring the opportunity for an interest rate cut, says Whitfield.
He gets some insight from Kevin Lings, Chief Economist at Stanlib Asset Management.
Dipping below the inflation target band doesn't happen often says Lings, but there was in fact a slight drop very briefly during 2020.
However, critically over time, inflation has been moving towards the bottom end of the target and the Reserve Bank has to some extent responded to that by cutting interest rates.Kevin Lings, Chief economist - Stanlib Asset Management
I think more noticeable is that our core inflation rate - where you're stripping out things like food and petrol and energy - that is at 2.6%... so if you look at the broad base of measures, inflation is incredibly low in South Afria.Kevin Lings, Chief economist - Stanlib Asset Management
With the economy as weak as it is, it's just so difficult to pass on any sort of cost increase that companies are experiencing... For example, clothing inflation at the moment is 0.2%, footwear at 0.6%. The inflation rate for appliances like a fridge is well below 1%.Kevin Lings, Chief economist - Stanlib Asset Management
He acknowledges that the inflation rate people experience on a daily basis would certainly be higher than the average of 2.9%.
The rate is particularly low for those items - like a car or fridge - that aren't bought every day.
However the food inflation rate is 5.4%. Education inflation is over 6%; electricity inflation 6%. Water inflation also around 6%.Kevin Lings, Chief economist - Stanlib Asset Management
The items you're encountering on a monthly basis, that you're much more aware of - yes, those numbers are higher.Kevin Lings, Chief economist - Stanlib Asset Management
The coming 15% increase in buying electricity along with another fuel price hike will have to be taken into consideration by the Reserve Bank.
And this affects the decision on interest rates.
The Reserve Bank will be aware that while inflation is at 2.9%, in a couple of months' time it could be around 5%.Kevin Lings, Chief economist - Stanlib Asset Management
You don't want to be cutting interest rates at a time when inflation is going to obviously be moving higher.Kevin Lings, Chief economist - Stanlib Asset Management
Listen to the conversation in detail below:
This article first appeared on CapeTalk : Inflation drops below Reserve Bank target on the eve of interest rate decision
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