August 21, 2019 / 9:19 AM / 3 months ago

UPDATE 1-S.Africa's July consumer inflation falls to lowest since January, raising bets of rate cuts

(Adds details, analyst comments)

JOHANNESBURG, Aug 21 (Reuters) - South Africa’s consumer inflation fell more than expected to its lowest since January on Wednesday due to subdued fuel and municipal tariffs prices, raising the chances the central bank will cut lending rates to support a flagging economy.

The South African Reserve Bank (SARB) lowered lending rates to 6.5% in July, but suggested future cuts were not a foregone conclusion despite calls for it to do more to support the weak economy.

Headline consumer price inflation slowed to 4.0% year-on-year in July, the lowest since January and under a consensus forecast of 4.2%, data from Statistics South Africa showed.

Since the bank’s July meeting the rand has suffered a beating, falling around 10% in August alone, as 230 billion rand ($15.09 billion) bailout for state power firm Eskom and political uncertainty around President Cyril Ramaphosa upped the threat of credit downgrades to junk.

But the subdued inflation print, which analysts say reflects a weakening economy where consumer spending is stagnating and companies are struggling to eke out profits, is set to push the bank to cut rates again to ignite economic activity.

“You’re seeing serious levels of disinflation in the economy and the outlook for growth is weak as well. In this environment the SARB is probably justified in providing a little bit of monetary stimulus,” said Jeffrey Schultz, an economist at BNP Paribas.

Africa’s most industrialised economy contracted by 3.2% in the first quarter as nation-wide power cuts by the ailing utility Eskom hit mining, manufacturing and retailers.

“There’s probably scope for two more 25 basis points reductions to rates, one this year and one next year,” Schultz said.

Before the inflation data surprise, a poll in the previous week by Reuters showed all but two of the 20 economists surveyed saw lending rates staying on hold at the bank’s September meeting.

$1 = 15.2391 rand Reporting by Mfuneko Toyana; Editing by Toby Chopra

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