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South African Inflation Slows, Adds to Rate Cut Hopes

South African inflation slowed for a fifth consecutive month in May, reaching 4.6 percent and giving the central bank an opportunity to cut interest rates once more before rising energy and wage costs add to price pressures.

Inflation eased from 4.8 percent in April, the Pretoria- based statistics office said on its website today. It was in line with the median estimate of 21 economists surveyed by Bloomberg. Prices rose 0.2 percent in the month.

The Reserve Bank has cut its benchmark interest rate seven times to 6.5 percent since December 2008 to help pull Africa’s biggest economy out of recession. Consumer spending has been slow to recover and the window for more rate cuts may be closing as workers push for higher pay and electricity costs increase.

“We are in the sweet spot for inflation,” said Kevin Lings, a Johannesburg-based economist with Stanlib Asset Management. “It will go lower over the next couple of months” and “you can make the argument” for rate cuts, though that is unlikely to happen, he said.

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. The Reserve Bank, which will make its next interest rate decision on July 22, expects inflation to stay within the target until the end of next year.

European Crisis

A further rate cut may help to boost consumer spending, which makes up two-thirds of demand in the economy, and offset a drop in exports as the European debt crisis threatens to stall economic growth in that region.

“South Africa’s recovery is weak and dependent on external factors,” Razia Khan, chief economist for Africa at Standard Chartered Plc in London, said in e-mailed comments. “The risks of renewed rate easing to give the economy that additional bit of stimulus is high.”

Reserve Bank Governor Gill Marcus on May 20 raised concern about weak growth in Europe, which buys almost a third of South African exports. She also cited rising electricity costs as the main risk to inflation.

“This data doesn’t mean a rate cut,” Peter Attard Montalto, an economist at Nomura International Plc in London, said in an e-mailed note. “It is the cyclical low in consumer price inflation which the South African Reserve Bank is already expecting. They will look through this to see inflation rising” to more than 5 percent over the medium-term and accelerated growth.

Wage Increases

In the past few months, 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 in May. 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 rand traded at 7.5602 per dollar at 12:56 p.m. in Johannesburg, little changed from before the release of the inflation data. The South African currency has declined 2.6 percent against the dollar this year, after posting a 1.6 percent gain in the first quarter.

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