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Inflation falls below Reserve Bank target

| Economic factors

THE COUNTRY'S inflation decelerated in February, confirming an all-but accepted consensus on the market that the South African Reserve Bank (SARB) will keep interest rates on hold for the foreseeable future as the print fell below bank's mid-tier range of between 3 and 6 percent.

Data from Statistics SA (StatsSA) yesterday showed that the annual headline inflation rate slowed to 2.9 percent in February from 3.2 percent in January – the lowest reading since June last year, when the rate was 2.2 percent amid a slowdown in prices of food and non-alcoholic beverages.

StatsSA said that several medical insurance providers did not implement annual price increases this year as a significant change in health-care consumption patterns last year resulted in an increase in their cash reserves.

PricewaterhouseCoopers (PwC) chief economist Lullu Krugel said the biggest driver of disinflation in February was easing price pressures in the “miscellaneous goods and services” basket, which includes insurance products. Krugel said that it was unlikely that the central bank's Monetry Policy Committee (MPC) would shift to monetary policy tightening with a rate hike as soon as the second quarter of 2021 following a 3:2 split in votes in January.

“PwC is of the view that the fragile nature of the economic recovery will keep the SARB from lifting interest rates in the months ahead and quite possibly delay a start to policy normalisation until early in 2022,” Krugel said.

Interest rates have remained stable as subdued inflationary pressures slowed consumer prices to an eight month low in February.

The MPC will today announce its rates decision, following a three-day meeting.

However, the slowdown in health inflation has seen the average annual increase across medical aid schemes peak at 4.7 percent in February, substantially lower than the rate recorded a year ago of 9.6 percent.

Anchor Capital investment analyst Casey Delport said a moderate inflation of 2.9 percent would help to ease inflation risks going into the interest rates decision. “Along with most market participants, we expect that the repo rate will be unchanged,” Delport said.

In January, the SARB forecast the rate of inflation to increase in the near-term and average 4.5 percent

during the second quarter. Fuel prices increased further in February, rising by 5.2 percent month-on-month, with the price of inland 95-octane petrol rising by 81 cents to R15.67 per litre.

Momentum Investments economist Herman van Papendorp said though hefty increases in some items were on the way, the MPC might use a more hawkish language.

He said though food prices were encountering pressure from a number of sources, interest rates would remain unchanged throughout 2021.

“Internationally, the pressure stems from China's rising demand for grain, while lower global palm oil supplies continue to drive vegetable oil prices higher,” he said. “However, the MPC will seriously consider that South Africa is still in the midst of a health pandemic with a bleak vaccination outlook, as well as high unemployment.”

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