Inflation eases even further - 25th Aug 2010

The Government has still under Finance Minister Trevor Manuel, set a target corridor for the inflation of between 3% and 6%. Long gone are the inflation peaks of over 20% inflation mid Eighties, but there is still room for improvement.

Currently, the latest inflation forecast foresees 3.8% shortly, itself a full 1% lower than foreseen earlier this year. The prime interest rate at 10% is at 30 year lows (so fully into re-convergence) and the bond yields straddling 7%-8% are also approaching new structural territory on the downside.

The two key factors are global events and the Rand. Sufficiently large capital inflows, if not resisted, could push the Rand firm enough, thereby giving us another cyclical inflation downside surprise while also further eroding our long bond yields.

Inflation could conceivably yet lose another 1%, and long bond yields another 1% to 3%.

In the process we could presumably also expect the SARB cutting rates by another one or two notches with prime potentially heading for 9%.

And the longevity of all this?

As in 2006 one would look for some cruel reversal to undo all this good news, and send all our benchmarks soaring back to half way their 1980s peaks.

But then again, global conditions may still favour us for quite a while, as discussed elsewhere.

Even then we must still allow for own goals.

(Based on Cees Bruggeman, FNB)