S.Africa CPI returns to target band, risks remain
JOHANNESBURG (Reuters) - South Africa's consumer price inflation returned to the 3 to 6 percent target band for the first time in more than 2-1/2 years in October, a dip that may be temporary as higher power prices loom.
Statistics South Africa said on Wednesday annual headline CPI slowed in line with expectations to 5.9 percent in October from 6.1 percent in September and was unchanged on a monthly basis compared with 0.4 percent the previous month and a 0.1 percent forecast.
Headline inflation has stayed above the central bank's target band since piercing it in March 2007, peaking at close to 14 percent in August last year before gradually coming down.
As inflation has slowed, the central bank has reduced interest rates by 5 percentage points between December 2008 and August this year, totally unwinding increases in the two years to June 2008.
But analysts said the dip back into the band could be temporary.
"Obviously it creates some optimism in terms of consumer spending. But we should be a bit wary that the annualised rate could climb towards year-end again due to the base effects," said Christie Viljoen of NKC Independent Economists.
The central bank has said it expects inflation to fall within the target band on a sustainable basis by the second quarter of 2010 and sees high electricity price rises as the main long-term risk to the outlook.
State-owned electricity firm Eskom will submit a revised request for tariffs after strong criticism of its initial plan to raise prices by 45 percent a year over the next three years.
"What remains of concern is the proposed 45 percent electricity tariff increase by Eskom. We will see how long inflation will be maintained within the band," said Freddie Mitchell, economist at Efficient Group.
The central bank expects inflation to fluctuate between 5.3 and 5.9 percent, provided electricity prices increase by only 25 percent a year over the next two years.
The central bank has left interest rates unchanged at its three previous meetings.
Analysts said the October inflation reading was unlikely to influence monetary authorities, who would focus more on the fact that South Africa exited its first recession in almost two decades in the third quarter with seasonally-adjusted annualised growth of 0.9 percent.
"These concerns (power prices) together with yesterday's supply-side GDP numbers showing the South African economy emerged from the recession in Q3, in our view, also signals that the SARB's window for further monetary easing has now largely closed," Absa Capital said.
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