The South African Producer Price Index fell by 3.51% for September 2008, its largest ever monthly fall, with the annual rate falling to 16.0%. A survey by I-Net Bridge had consensus expectations for the year-on-year change in PPI at 18.1%. Changes in PPI generally lead changes in CPI - consumer inflation - by around 3 to 6 months and, together with the anticipated changes in the calculation of the consumer inflation basket in January 2009, likely signals the peak of the South African inflation environment. In addition the main drivers of inflation - maize and oil prices - have also weakened significantly with their year-on-year changes to October close to or at zero. It is our expectation that once inflation rates have fallen by two to three percent in excess of the two or so percent in January that the central bank will begin considering cutting interest rates. This may come as soon as February 2009, expectations for a rate cut in December this year are overdone.

Gross domestic product in the US fell by 0.3% and in the UK by 0.5% during the third quarter. A recession is defined as two consecutive quarters of negative GDP growth.

Global rate cuts continue, intensify
Contrary to our expectations in early December, the South African Reserve Bank elected to lower interest rates by 50 basis points. This is the first interest rate decrease since April 2005, following the Bank's sequence of ten 50 basis points increase in the repurchase rate. December's decision is largely as a result of the Bank's anticipation that inflation is likely to fall dramatically during 2009, perhaps even falling to within the inflation target before the year is out, as well as the pressure the Bank must have felt as central banks around the world lowered their prevailing rates aggressively. It is likely that rates in South Africa will continue to fall throughout 2009, perhaps by as much as 300 - 400 basis points, with a cut of as much as 100 basis points in February alone.

The SARB was not alone in cutting interest rates in December; all four of the central banks we monitor in this Report continued to cut interest rates. The BOE and the ECB reduced rates by a significant 75 basis points and the Fed by an astounding 100 basis points. The Fed has now lowered rates to 0.25% and has very little ammunition with which to fight any further bad news the US economy receives in 2009 and runs the very real risk of Japanese-styled monetary policy impotence. Further stimulus can therefore only come from the government, most likely in the form of spending plans (think America's New Deal) and/or in lower taxes, which is highly unlikely given the woefully over indebted state of the US.

SA inflation decelerates dramatically
South Africa's Producer Price Index has fallen in each of the last three calendar months (-3.5%; -0.5% and - 1.3%) bringing the annual change down dramatically from its peak in excess of 19% to a touch over 12%. This is largely a result of the, perhaps more dramatic, fall in the oil price. Having peaked at around $140 a barrel, the price of oil has fallen some 70% which has a natural knock on effect on petrol prices locally and thereby the cost of almost every good and service in the economy (Jan '09 update: it is likely that in the first week of January that petrol prices in South Africa will fall by around R1.30 a litre).

Consumer prices, however, rose marginally in November; an anomaly in an ongoing deflationary environment is our assessment. We anticipate that consumer inflation will fall off a cliff throughout 2009 as a result of base effects, a deflationary global environment, falls in commodity prices and changes to the inflation basket by Statistics South Africa (this change alone will take somewhere between 2 and 3% off the annual rate of change in consumer inflation).