The move sends a positive signal to the markets and consumers, and will give some relief to bond-holders and those paying off motor vehicles, credit cards and other debts.
According to a statement issued by the SARB, since the previous meeting of the Monetary Policy Committee, domestic inflation has moderated and is expected to decline further over the coming months.
CPIX inflation (headline inflation excluding mortgage interest cost) measured 13.6% in August 2008 and subsequently declined to year-on-year increases of 13.0% and 12.4% in September and October, respectively. Food, petrol and electricity prices were the main contributors to the inflation outcomes, despite the petrol price reductions in September and October. Food prices increased at a year-on-year rate of 17.2% in October, while petrol and electricity prices increased by 31% over the same period. If food and petrol were excluded, CPIX inflation would have measured 8.4% in October, compared to 8.5% in September.
Producer price inflation also showed signs of moderating in the past two months despite significant electricity price increases. Producer price inflation increased at a year-on-year rate of 19.1% in August but moderated to 14.5% in October. Agricultural food prices declined for the third successive month in October when the year-on-year rate declined to 10.4%. Manufactured food prices increased by 15.6% in October, compared with 20.5% in August.
Inflation is expected to average 6.2% and 5.6% in 2009 and 2010 respectively and to average 5.3% in the final quarter of 2010. However, the forecasts are subject to a greater degree of uncertainty than usual, given the highly volatile global environment, and the uncertainty related to the impact of the rebasing and reweighting of the CPI basket to be introduced by Statistics South Africa in January 2009.
Household consumption expenditure contracted in the third quarter for the first time since 1998. Consumption of durable goods in particular declined by almost 10%, while non-durable goods consumption also contracted. Motor vehicle sales continued to decline in October and November, while real retail trade sales declined further in October. The FNB/BER Consumer Confidence Index showed a further deterioration in the fourth quarter of 2008.
Global developments are also expected to contribute to downward inflation pressures. Apart from sharply declining commodity prices, the decline in the volume of world trade has also lowered transport costs significantly. Growth forecasts have been revised down significantly, particularly in the advanced economies, and the expected protracted slowdown is likely to lower prices of other goods as well, as the pricing power of firms dissipates.
The MPC has therefore decided to reduce the repurchase rate by 50 basis points to 11.5% per annum with effect from 12 December 2008.
