South Africa Has Last Rate Cut Chance as Prices Ease

South African inflation (SACPIYOY) is likely to ease for a fifth month, giving the central bank what may be a last chance to cut the key interest rate before higher wages begin to push up the consumer price index from a four-year low.

Inflation probably slowed to 4.6 percent in May from 4.8 percent in the previous month, according to the median estimate of 21 economists surveyed by Bloomberg. Statistics South Africa, based in the capital, Pretoria, is due to publish the data at 11:30 a.m. local time on June 23.

A bumper corn crop and the rand’s gains in the first quarter helped to bring inflation back inside the central bank’s 3 percent to 6 percent target range. That gave Governor Gill Marcus scope to lower the repurchase rate by half a percentage point to 6.5 percent on March 25, the seventh reduction since December 2008. The window for more cuts may be closing as workers push for higher pay and electricity costs surge.

“The opportunity is there now,” said Colen Garrow, an economist at Brait SA in Johannesburg. “They shouldn’t wait. The Reserve Bank should be forward-looking on its interest-rate policy.”

The economy’s recovery may be undermined by stalling growth in Europe, which buys almost a third of South African exports. Another interest rate cut may help to spur consumer spending, the source of two-thirds of economic expenditure, and help weaken the rand, boosting export competitiveness, Garrow said.

Cool Growth Environment

“If the bottom fell out of Europe, we shouldn’t be too surprised if the market starts scaling back its growth forecasts for next year,” said Garrow. “We’re going into a very cool growth environment.”

The rand advanced 1.7 percent against the dollar in the first quarter, adding to its 28 percent surge last year. South Africa’s benchmark rate compares with almost zero in many developed countries, making local interest-bearing assets attractive to foreign investors. Lower rates may help to dim the appeal of those assets, curbing the currency’s gains.

The rand was at 7.4241 against the dollar as of 9:45 a.m. in Johannesburg today.

The Reserve Bank expects the economy to expand 2.7 percent this year and 3.6 percent in 2011, compared with a 1.8 percent contraction in 2009. Growth accelerated to an annualized 4.6 percent in the first quarter, mainly due to a rebound in mining and manufacturing output.

Europe Risk

Marcus said on May 20 that the European debt crisis may undermine the recovery in South Africa and that rising electricity costs was the main risk to inflation.

Since then, wage settlements have surged, adding to price pressures. Workers at Transnet Ltd., the state-owned rail and ports company, won an 11 percent pay increase following an 18-day strike last month. Power utility Eskom Holdings Ltd. is currently in talks with workers, offering to raise wages by 8 percent, while workers are demanding 15 percent.

The Reserve Bank will make its next interest rate decision on July 22.

Event                                             Date
Telkom South Africa Ltd. annual earnings          June 21
Tiger Brands Ltd. annual general meeting          June 21
Remgro Ltd. annual earnings                       June 22
Argent Industrial Ltd. annual earnings            June 22
Non-farm jobs data for first quarter              June 22
Hyprop Investment Ltd. annual general meeting     June 22
Consumer-price inflation                          June 23
Current account deficit                           June 24
Producer-price inflation                          June 24
Avusa Ltd. annual earnings                        June 24

To contact the reporters on this story: Nasreen Seria in Johannesburg at

To contact the editor responsible for this story: Peter Hirschberg at

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