August 23, 2017 / 9:15 AM / a year ago

UPDATE 1-South Africa's inflation slows, boosting chances of further rate cuts

(Adds details, rand reaction, analyst comment)

JOHANNESBURG, Aug 23 (Reuters) - South Africa’s consumer price inflation retreated to its lowest in nearly two years on Wednesday, boosting the chances of further cuts to interest rates by the central bank which is keen to support flagging economic growth.

The South African Reserve Bank (SARB) unexpectedly cut benchmark lending rates in July, taking advantage of slower price-growth, particularly in food inflation, in a bid to lift the economy out of recession.

Headline consumer inflation slowed to its lowest since September 2015, falling to 4.6 percent year-on-year in July, the statistics agency said, as food prices fell further along with most sub-sectors. On a month-by-month basis prices inched up to 0.3 percent from 0.2 percent.

A poll by Reuters last week forecast the bank would cut interest rates again in November, and possibly even September given the relatively tame inflation outlook.

The rand, which traded sideways for most of the morning turned weaker after the data release, slipping 0.25 percent to 13.2575 per dollar at 0804 GMT.

Treasury One’s Andre Botha said the rand weakened “because the chances of another rate cut increased and that saw some foreigners looking elsewhere for high yields.”

The SARB cut lending rates last month for the first time in 5 years, easing the benchmark repo rate by 25 basis points to 6.75 percent. The bank also halved its 2017 growth forecast to 0.5 percent.

“Given the speed with which inflation has improved, markets may start to look at the likelihood of easing even before November, with the rand exchange rate likely to be a key variable,” said chief Africa economist at Standard Charted Razia Khan.

Africa’s most industrialised economy slipped into recession in March, and has seen the economy’s outlook worsen with nearly all major sectors contracting and political uncertainty linked to infighting in the ruling party putting pressure on growth.

The African National Congress, in power since the end of apartheid in 1994, is locked in a battle to replace President Jacob Zuma when his term as party leader ends in December, with ratings firms warning this was distracting government from implementing policies needed to boost growth. (Reporting by Mfuneko Toyana; Editing by James Macharia)

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