Consumer Price Inflation (CPI) – To cut or not to cut?

Luigi Marinus, Portfolio Manager at PPS Investments.

CPI declined to 4.0% year-on-year in February compared to 4.4% in January. This is the lowest level for more than two years. Month-on-month from January to February, CPI increased by 0.8%.

The three main reasons for the benign growth was that the price of food and non-alcoholic beverages experienced a zero increase for the month, the price of housing and utilities, which makes up nearly a quarter of the index, was up only 0.1% for the month and the fuel price declined by 1.8% for the month.

This relatively low level of inflation, which is now well below the midpoint of the target band, will put pressure on the South African Reserve Bank (SARB) to cut interest rates at their next meeting, especially considering the desire to increase the GDP growth level in the country. They will have to keep in mind the influence of the increase in VAT which comes into effect on 1 April and the fact that the current account deficit widened from 2.1% of GDP to 2.9% of GDP.

The stability of the rand at levels significantly stronger than one and two years also needs to be considered. The positive effect of the strong rand on inflation will unravel if relative strength is not maintained. The SARB has certainly managed their mandate well in order to keep inflation at the levels we have been experiencing, but South Africans will be expecting some interest rate relief when the opportunity to do so seems evident.