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December rate cut on the cards

By unknown | Nov 27, 2008 | COMMENTS [ 0 ]

Robert Laing

Robert Laing

Improving inflation raises hopes the Reserve Bank's Monetary Policy Committee (MPC) may give consumers a Christmas present of a 0,5percent cut in interest rates when it next votes on December 11.

Inflation slowed for the second month in October, falling to 12,4percent from August's 13,6percent peak.

The committee currently uses the consumer price index excluding mortgages (CPIX) as its yardstick for inflation, but that will change to the broader consumer price index (CPI) from next year.

Statistics South Africa measured October's year-on-year CPI as 12,1percent, slightly lower than the 12,4percent CPIX.

January's switch in methodology is expected to bring the headline inflation figure down sharply.

Economists expect this month's inflation to be around 11,6percent, taking it back under the 12percent that the Reserve Bank has held its repo rate at since June.

Dynamic Wealth economist Chris Harmse said: "The expected sharp drop in the petrol price of R1,60 per litre next week may reduce the CPIX for December to close to 10percent.

"Adding the impact of the technical change in inflation from January onwards due to changes in the weights and basket, the CPI for January will be below nine percent.

"It leaves enough room for the MPC to reduce the repo rate in December - if it is indeed forward looking."

Nedbank economist Carmen Altenkirch said: "Although the forward rate curve is pricing in a cut at the December meeting, we believe that this is unlikely.

"First, the Reserve Bank might be concerned that a cut may have a disproportionate impact on the rand in thin markets over Christmas. Second, the authorities may also be concerned that it might send the wrong message to households."

She expects the committee to cut interest rates in February.

Though overall inflation slowed, a worrying factor in Stats SA's data was that food inflation remained stubbornly high.

The biggest month-on-month price increase was for vegetables which went up 4,7percent from September to October.

This was followed by two percent for sugar, and in turn two percent for "other" food, which includes sweets and chocolates.


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