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29 September 2004 Angelo Coppola

Commenting on the CPIX figures released yesterday, Martin Jankelowitz, head of market and economic research at Investment Solutions said: "It continues to amaze how consenus has been so slow to acknowledge the disinflationary trends in the SA economy.

The consensus range of forecasts was 3.5% to 4.4%."

The number represents the lowest CPIX on record (since 1998) and, importantly, marks the 12th consecutive month that the SARB's inflation target CPIX has come in within the target range.

He said in an environment of a strong Rand, and the resultant virtuous circle it is driving, it can be expected that inflation will pleasantly surprise.

Today's CPIX announcement marks the 6th consecutive month that inflation has come through better than expectations.

Governor Mboweni's latest MPC statement on 12th August commented that inflationary trends are coming through better than the SARB's models were previously projecting. The August interest rate cut, which caught market participants by suprise, becomes increasingly justified in the light of the released inflation stats, said Jankelowitz.

What are the implications for monetary policy going forward?

The SARB's next Monetary Policy Committee (MPC) meeting is on October 13th/14th.

"Although the latest CPIX number is supportive of a further interest rate cut, the level of the Rand is likely to be the primary driver for any interest rate decision," said Jankelowitz.

"Should the Rand/$ be in the low R6's (or the equivalent strength be reflected in the trade-weighted currency), then the SARB is likely to cut interest rates.

"If the Rand is closer to the high R6's (or the equivalent weakness in the trade-weighted currency), then the SARB is likely to leave rates on hold.

Note, South Africa still has, notwithstanding 600bps in interest rate cuts, amongst the highest real interest rates in the world, at around 3.8%.

So, providing the trade-weighted value of the Rand remains reasonably stable, there remains scope for further reductions in nominal interest rates.

Furthermore, with CPIX currently at 3.7%, it remains well below even the mid-point of the target range.

With the absolute level of inflation so low, there remains "much room to manouvre" for the SARB before any concerns return," said Jankelowitz.

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