Inflation will fall within the SA Reserve Bank's target range of three to six percent by the end of the year, Investec Group said on Wednesday.

This followed the announcement by Statistics SA that Consumer Price Inflation (CPI) fell significantly in September, from 6.4 percent year-on-year to 6.1 percent.

"The lower than expected outcome was due to the ongoing moderation in processed food price inflation, one of the main components, due to weak demand, international price deflation and rand strength," Investec Group economist Annabel Bishop said.

A few other categories also showed lower contributions to the annual outcome, supporting the downward trend and Investec's long-held view that the recession would result in lower inflation, she said.

"We continue to believe CPI inflation will fall below six percent in the fourth quarter of this year, due to recessionary pricing."

A December cut?

Mild and not unusual upward pressure on the month came from the prices of alcoholic beverages — which was typical of a recession, housing and utilities and communication, Bishop said.

The better than generally expected figure might make the SA Reserve Bank's (SARB) Monetary Policy Committee's inflation forecast more benign, "but we still don't believe it will ease monetary policy at the next meeting, although the window for a December 50 basis points interest rate cut is opening wider", Bishop said.

Investec's CPI forecast for 2010 had risen markedly with the inclusion of Eskom's mooted 45 percent increase in electricity tariffs.

"If this scenario is chosen (a 200 percent increase over three years, 285 percent increase over five) then inflation will remain above the midpoint and not consistently in target in the latter part of 2010 and 2011," Bishop said.

Eskom approached World Bank

"This is the period the SARB considers when looking to adjust interest rates to influence the inflation outcome," she said.

Bishop said some good news for inflation that came out of the Medium Term Budget Policy Statement on Tuesday was the indication that Eskom had approached the World Bank for funding, with US$3-billion potentially available to the parastatal.

"With capital funded through borrowings and running expenses through revenue this would be the right approach to take, instead of burdening the consumer with the R1.3-trillion infra-structure bill or government, which is struggling to make ends meet."

Bishop said that $3-billion or R22.5-billion at an exchange rate of R7.50/US would not go very far in the medium- to long-term but would relieve some short-term pressure.

"The era of cheap electricity has ended globally and rising tariffs, including those of water and other administered prices, will place upward pressure on inflation and make it even more difficult to achieve the target, i.e. inflation will become less stable," she said.

Since 2001, when targeting began, the targeted measure had averaged close to seven percent.

"The impact on inflation if the proposed electricity tariff increases are implemented will be severe and ongoing, preventing the consistent attainment of the inflation target and casting doubt over the validity of the entire inflation targeting process," Bishop said.

Investec continued to maintain the band should be widened to 1.5 percent to two percent around the midpoint on a temporary basis, instead of the current 1.5 percent, with the midpoint itself at 5.5 percent or five percent year-on-year respectively.

Sapa

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