JOHANNESBURG: South African consumer price inflation slowed to its lowest rate in seven years on Wednesday as the end of the worst drought in decades helped push down food prices, data showed on Wednesday.
The rand briefly rallied to a session high after the inflation data before easing back above the 12 per dollar mark, with investors doubtful the unexpectedly low reading would be enough to persuade the South African Reserve Bank to cut interest rates more.
The rand later rallied again to 11.9650 per dollar after data showed February retail sales climbed as price growth slowed.
Headline annual consumer inflation slowed to 3.8 percent in March from 4.0 percent in February, the lowest figure since January 2011, Statistics South Africa said. Month-on-month inflation slowed to 0.4 percent from 0.8 percent.
"While the inflation numbers suggest there is a good argument for accommodative monetary policy, leaving rates unchanged to us would be relatively accommodative," said Nedbank senior economist Nicky Weimar.
Economists polled by Reuters had expected prices to quicken to 4.1 percent on an annual basis and 0.6 percent on a monthly basis.
Bonds firmed up, with the yield on the benchmark 2026 paper dropping 2.5 basis points to 8.045 percent.
"Needless to say, this is good news for South African bonds," said chief Africa economist at Standard Charted Razia Khan, adding that she expected inflation to stay well within the central bank's 3-6 percent target band in the medium term.
"It does not however change our view that we are unlikely to see further SARB easing in this cycle," Khan said.
The central bank cut its main interest rate to 6.5 percent in March but warned that inflation was at a low point in the current cycle and that it expected consumer prices to rise above 5 percent in the medium term.
A 1 percent increase in value-added tax came into effect on April 1 and will put upward pressure on prices, analysts said.
Retail sales rose 4.9 percent year-on-year in February after increasing 3.3 percent in January, with analysts saying lower inflation and the looming VAT increase had encouraged spending.
"It seems consumers were front-loading purchases ahead of the VAT hike, so we expect a similar bump in the March figures," said Jana van Deventer of ETM Analytics.
Forward rate agreements due in three and six months were both pricing in a less than zero percent chance of a 25 basis-point cut in interest rates.
ESKOM TARIFF LOOMS
Nedbank's Weimar said that along with VAT the biggest risk to inflation was the possibility of a large electricity tariff increase by power provider Eskom, which is seeking to recover 67 billion rand ($6 billion) in higher than forecast operating costs through higher tariffs.
"What happens to Eskom's electricity tariffs will be very important. It will be applying for fairly steep increases and that could certainly see inflation trend much higher," Weimar said.
Food price inflation, a major concern for the Reserve Bank in the last two years due to drought, slowed to 3.5 percent year-on-year having hit 11.8 percent in December 2016. "We could see the decline in food price inflation start to moderate in the next few months, as base effects from the drought start to dissipate," said Investec chief economist Annabel Bishop in a note.
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