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Consumer inflation slowed to 15-year low in April

Nedbank says the Reserve Bank is unlikely to cut rates further in response to inflation below 3%.
Image: Waldo Swiegers, Bloomberg

South Africa‘s consumer price growth fell in April to its lowest since 2005, as a lockdown to curb the spread of the coronavirus closed most shops and industries, strangling demand and spending.

South Africa‘s Covid-19 infections exceeded 100,000 this week, with more than 2,000 deaths, just as government further eased restrictions in a bid to slow an economic free-fall.

Headline consumer inflation slowed to 3.0% year-on-year in April, its lowest in nearly 15 years, data from Statistics South Africa showed on Wednesday. Monthly prices swung into deflationary territory, down to -0.5% from a 0.35% increase in March.

On a year-on-year basis, only food prices saw an increase, albeit marginal. Transport prices fell 3.5%. Communications, clothing and restaurants and hotels also saw prices fall significantly.

Monthly inflation saw almost all the sectors in negative territory.

The slowdown to inflation comes even after 275 basis points of interest rate cuts by the central bank this year to ease pressure on consumers, signalling the start of a deflationary period for consumers and government as the economy stagnates.

“In the absence of reform, interest payments, and inefficient spending will tip S.A. into a deflationary debt spiral within the next five years,” economists at ETM Analytics said in a note.

Finance Minister Tito Mboweni delivers an emergency budget at 15:00. He is expected to paint a bleak picture of the economy.

Watch the Supplementary Budget speech live, here, at 3pm today (Wednesday)

In a note, Nedbank’s Group Economic Unit said it expects inflation to slow further in the short-term, “as the demand-suppressing effects of the coronavirus pandemic work themselves through the numbers.”

It added: “The Reserve Bank’s forecasts show a similar pattern, with average inflation rates of 2.8% and 2.9% forecast for the second and third quarters respectively. As inflation prints of below the Reserve Bank’s 3% lower bound are expected by the Bank, the Sarb is unlikely to cut rates further in response to inflation below 3%. Inflation will have to decline significantly below 3% for the bank to cut rates again this year.

“Growth will also have to disappoint to below the – 7% the bank forecast for 2020 to justify further cuts. For this reason, our base case is for rates to remain on hold for the remainder of the year.”

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