Inflation slowed less than expected last month, but this is unlikely to stop the Reserve Bank trimming interest rates by another half a percentage point today.

Consumer prices rose eight percent compared with the same month last year, down from a rise of 8.4 percent the previous month and its lowest level for 19 months, Statistics SA said yesterday.

The outcome was above forecasts for a rise of 7.9 percent, and showed that service prices rose 8.4 percent – the same pace as in April.

But mounting job losses and the sharp contraction in SA's economy so far this year will carry more weight in the decision of the Bank's monetary policy committee (MPC).

"It's a little discomforting that consumer inflation remains high ... but it would be a mistake to read too much into this," said Standard Chartered's regional research head for Africa, Razia Khan. The MPC "should still cut by 50 basis points".

The Bank has cut interest rates by 4.5 percentage points since last December, taking the repo rate down to 7.5 percent.

"Not in the mood" for reductions

Each of the four cuts this year have amounted to a full percentage point, but the Bank's governor, Tito Mboweni, warned last month that the MPC was "not in the mood" for further significant reductions, due to "sticky" inflation.

Today's expected rate cut may be the last in this cycle, given price pressures generated by rising oil prices, electricity tariffs and double digit wage settlements.

"Given that the inflation outlook remains relatively uncertain, we expect the Bank to remain a bit more conservative this week," Absa Capital economist Jeffrey Schultz said. "We expect a half percentage point cut, which will probably mark the end of the rate cutting cycle."

Changes in interest rates take up to two years to make themselves fully felt, but the MPC is unlikely to stop lowering them yet in the wake of a barrage of grim economic data.

The Organisation for Economic Co-operation and Development yesterday forecast a deeper than expected recession for SA, predicting that the economy will shrink by two percent this year. Earlier this week the World Bank forecast a 1.5 percent contraction.

Business sector shed 179 000 jobs

Market consensus sees output contracting by about 1.5 percent after a 6.4 percent fall in the first quarter of the year – the steepest in 25 years.

In that period the formal business sector shed 179 000 jobs.

Inflation has breached its 3 percent – 6 percent official target range for more than two years, and is subsiding more slowly than expected.

That is due partly to stubborn food prices, which rose 12.3 percent versus the same month last year – an improvement on 13.7 percent in April.

During the month itself, the consumer price index (CPI) rose by 0.4 percent, compared with 0.5 percent in April.

Vehicle prices – which have a weight of 11 percent in the CPI – rose by a robust 1.4 percent last month.

Prices for most of the inflation basket's components rose by more than 6 percent, the data showed.

Rand improves the inflation outlook

"Overall, the resilience in retail inflation so far defies expectations by the Bank that the widening output gap will bring inflation down," said Thebe Securities economist Monale Ratsoma. He was referring to the difference between actual economic output, which is shrinking, and its potential growth rate, which the Bank puts at 4.5 percent.

Gains in the rand, which firmed by two percent to nearly R8/ yesterday, improves the inflation outlook.

"If the rand holds at its current levels ... consumer inflation could fall within the target range in the fourth quarter," said Nedbank economist Carmen Altenkirch.

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