A sooner-than-expected dip in consumer inflation provides the backdrop for a potential first cut in interest rates four months earlier than previously thought, in February 2009 instead of June.

This is according to economist from RMB, Ettiene le Roux, who says he has also added an additional 50 basis points to the cycle, taking it to 250 basis points against 200 before.

"Whereas at the previous Monetary Policy Committee (MPC) meeting we had expected CPIX inflation to fall below 6.0% in the first quarter of 2010, we now think this is likely in the third quarter of 2009. Regarding CPI, which should become the new target measure next year, a fall back within the target band is now possible in April 2010 (previously June)," explains Le Roux.

He also expects GDP growth to slacken to 2.8% next year, "which supports our view that the next move in rates is down".

He says that up until now RMB had projected a cycle comprising 200 basis points of cuts, starting in June next year.

"However, our forecast was partly reliant on the global economy experiencing a soft landing with commodity prices coming down, but not significantly.

Instead, quite the opposite has occurred. The global credit crunch has intensified to the point where the risk of a global recession six months ago is now likely to become a reality. Accordingly, commodity prices have fallen sharply, with the slump in the oil price taking us by surprise.

To be clear, it is not that we have become more optimistic about the outlook for services price inflation, it's just that the prospects for goods inflation have improved enough to justify us lowering our inflation forecast (despite the weaker rand)," he explains.

Why not then cut in December as some analysts are expecting? "Although the risk of such a move is increasing, we believe the market is too optimistic in expecting a better-than-even chance of a 50 basis point reduction before year-end," he says.

In explaining this thinking, Le Roux notes that at the time of the December meeting the MPC will only have inflation data for November.

"By our forecasts, CPIX then will still print around 12.6% year-on-year (y/y). Although on a declining trend, such a high number will make it difficult for the Bank to cut."

Le Roux says he is not convinced that the Committee will loosen policy before knowing the exact impact of the re-weighting of the basket on inflation.

"This is such a significant event (with huge uncertainty attached to it), that we doubt the central bank will cut before the outcome is known in February," he says.

Le Roux says that although domestic growth is moderating, the severity of the slowdown is nowhere near what developed countries are currently experiencing.

"Also, major central banks are cutting rates in an attempt to lessen the real economy impact of a specific and acute liquidity crunch relevant to their countries, which is not applicable to South Africa," he concludes.