Johannesburg - The monetary policy committee (MPC) of the Reserve Bank will have a close call to make on interest rates this afternoon after headline and core consumer inflation (CPI) surprised strongly to the downside yesterday.
The rand weakened against the dollar yesterday ahead of the interest rate decision after a lower-than-expected inflation number reduced the odds of a rate hike. At 4.33pm, the rand was trading 0.59 percent weaker at R12.399 to the dollar compared with its closing level on Tuesday.
“The downside surprise to CPI generated some selling pressure, given that the market interpreted it as an indication that the (Reserve Bank) is going to refrain from hiking tomorrow (today),” said Jana van Deventer, a market analyst with ETM Analytics.
The CPI rate edged upwards by 0.1 percent last month to its six-months high of 4.7 percent from 4.6 percent in May.
The outcome was far lower than consensus forecasts for an inflation rate of 5 percent in June. On a month-to-month basis, prices were up by 0.4 percent last month compared with 0.3 percent in May.
Core inflation, which excludes the prices of food, petrol and energy, slowed to 5.5 percent year on year from 5.7 percent in May, while rising 0.3 percent month on month from 0.2 percent.
The MPC’s rate decision hangs in the balance as it is forecast it will raise rates by 25 basis points today to 6 percent, according to 17 out of 31 analysts surveyed by Bloomberg, while 14 predict no change.
“The Reserve Bank will be cognisant of the fine balance between high inflation and low growth,” said Nedbank in a note to clients.
Growth subdued
With South African growth subdued and oil prices falling, the CPI print may tempt the MPC to delay the interest rate increase until its September meeting.
On the other hand, the Reserve Bank has indicated a rate increase is imminent, and with US Federal Reserve chairwoman Janet Yellen implying a September hike is possible, the central bank will not want to be seen as being behind the curve.
The MPC may compromise by accompanying a rate increase with a dovish statement, seeking to lower expectations of future tightening.
The biggest drivers of the annual inflation figure were the housing and utilities as well as miscellaneous goods and services.
Nedbank economists Dennis Dykes and Busisiwe Radebe said that inflation was expected to continue its upward trend this year.
Utility prices
“Next month will be particularly significant as the new utility prices will be included in the inflation numbers.
“Other factors that will contribute to higher inflation include the anticipated higher food prices later in the year as well as a weaker rand dollar exchange rate,” they added.
Headline inflation is seen temporarily breaching the upper band of 6 percent in the first quarter, according to the MPC’s statement released in May.
Annabel Bishop, the chief economist at Investec, said the CPI inflation was likely to reach 5.7 percent at the end of this year, and end 2016 at 5.5 percent year on year.
“The first quarter of 2016 will see CPI inflation hit a high point for the year at 6.6 percent year on year on pure statistical base effects. Indeed, without the first quarter of 2016, which is distorted by statistical base effects, CPI inflation will likely average 5.6 percent year on year next year. Consumer demand is modest in South Africa, and so is demand-led inflation,” Bishop added.
She said she expected the Reserve Bank to very slightly moderate its inflation expectations as a result of the lower Brent oil price at $56.4 (R696) per barrel yesterday.
“A petrol price cut of 38c per litre is currently on the cards for August, driven by the recent decline in the oil price,” Bishop added.
Azar Jammine, the chief economist at Econometrix, said the lower-than-expected CPI inflation illustrated the disinflationary environment inherent in a weak economy in which businesses were finding it very difficult to pass on cost increases.
“It is the logical outcome of the situation in which producer price inflation, manufacturing and wholesale inflation have all been well below the CPI inflation rate this year.”
* Additional reporting by Bloomberg and Reuters
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