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Inflation falling, rate cuts coming

By Staff Writer
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Inflation falling, rate cuts coming

Inflation has fallen to 7.7%.

This is the lowest it has ever been with the new basket to work it out.

What this means is that there is a new way to calculate inflation. And the new way shows inflation to be much lower than what it was under the old system of calculating inflation.

Stats SA has published a full breakdown of the new basket used to measure inflation.

The outcome is that now that inflation is measured to be significantly lower, the scene has been set for the Reserve Bank to cut interest rates tomorrow (the 5th of February) and finish the policy of inflation targeting.

The financial news outlets have had a look at this story and this is what they have to say.

Business Day said that because the inflation figure under the new method of measurement was so much lower than expected that this would more than likely lead the Monetary Policy committee to not cut rates by a very large percentage.

There has been some speculation that the MPC would cut rates by more than 100 basis points; however this was now unlikely as inflation was dropping faster and the rate would not have to come down as quick to spur spending in the economy.

However they were of the opinion that the MPC would cut the rate by at least one percent or 100 basis points. There is a minority of analysts who believe that the MPC will only go for a 50 basis points cut, but most were plumping for the full percent.

The Dispatch also looked at the drop in inflation and looked at the various components that have influenced its fall under the new weighting regime. These changes were mainly driven by food and petrol costs.

Fin24 called it in their headline 'Cut by 100 basis points'. they are somewhat cynical about the entire re-weighting process and note that in 2006, which was the year the new pattern of spending was derived from even though 2008 is now considered the base year, there could be a skew in it due to the fact that in 2006 there was still a boom going on and 'it was quite conceivable that people were spending more of their pay on buying cars and less on buying food'.

The article finished with a bold call for the MPC to cut rates by a full 100 basis points.

The outcome of the MPC meeting will be known to Trevor Manuel before he gives his budget speech next week and this could have some last minute influences on his thinking.

iAfrica looked at the possibilities for the budget speech.

Justmoney is going to go with the analysts and expect a rate cut to happen. What this means for you is that you maybe able to renegotiate your homeloan, and you may be better able to consolidate your debt into your mortgage. Make a budget and keep to it and as interest rates fall you will end up with more real money in your pocket at the end of the year.

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