S.African inflation slows to eight-year low, putting rates cuts back in picture

South African consumer inflation dropped in October to its lowest level since February 2011 as fuel prices fell sharply, raising the chances of an interest rate cut by the central bank on Thursday.

Headline consumer inflation slowed to 3.7% year-on-year in October from 4.1% in September while monthly price growth was flat at 0%, Statistics South Africa said on Wednesday, adding that a 4.9% decrease in petrol prices was the main factor in the slowdown. Most other product prices also fell.

The South African Reserve Bank's policy committee meets for the last time in 2019 on Thursday, and is largely seen keeping benchmark lending rates on hold again at 6.5%, with a weak growth outlook trumping inflation well within the bank's target of 4.5%.

Twenty-one of the 28 economists polled by Reuters last week said the repo rate would remain on hold while the remaining seven said the monetary policy committee (MPC) would cut rates by 25 basis points.

"Does the lower-than-expected inflation reading increase chances of a rate cut tomorrow, perhaps. But the SARB's fundamental premise is to maintain a healthy real-rate buffer given the increased fiscal risk premium," Jeffrey Schultz, an economist at BNP Paribas.

"In short, we need tighter fiscal policy to get looser monetary policy," Schultz said.

The real rate of interest, or yield, offered by South Africa's bonds and currency is higher than most emerging markets, and more attractive than the negative rates on offer in many developed markets, but the weak economy threatens to diminish that.

In October, the Treasury slashed its 2019 growth forecast to 0.5% from 1.5% and said public debt would climb to more than 70% of GDP soon.

The rand pared back some losses after the inflation release, trading at 14.8400 per dollar form 14.8640 just before.

(Reporting by Mfuneko Toyana; Editing by Toby Chopra)