Johannesburg - South Africa’s headline consumer inflation unexpectedly slowed last month, adding to recent data that could prompt the SA Reserve Bank to keep interest rates on hold.
It has kept rates on hold despite inflation persisting above a 3 percent to 6 percent target band, inhibited by sluggish growth, which it expected to be just 0.6 percent this year.
Statistics SA said yesterday that consumer price index (CPI) inflation was at 6.1 percent year on year last month, slightly above the target, compared with 6.2 percent in April.
Expectation was for headline CPI inflation to quicken to 6.4 percent. Month-on-month inflation also braked to 0.2 percent compared with 0.8 percent in the previous month. Core inflation was unchanged at 5.5 percent year on year. Food price inflation moderated to 10.8 percent from 11.3 percent.
“Recent rand appreciation and dissipating food inflation threats suggest that the peak may not be as high as initially envisaged,” Jason Muscat, a senior analyst at FNB, said.
“The weaker-than-expected inflation reading… will provide welcome relief for the Reserve Bank,” William Jackson, the senior emerging markets analyst at Capital Economics, said.
“Further ahead, if we’re right in thinking that inflation will stay above target and the economy will eke out some positive growth, additional rate hikes are likely by the end of this year.”
Policymakers are keen to avert a technical recession – two consecutive quarters of contraction – after the economy shrunk by 1.2 percent in the first three months of the year due to weakening output in the key mining and agriculture sectors. The rand held stable against the dollar after the data, with investors focused on today’s referendum on whether Britain will stay in the EU.
Upside
Peter Attard Montalto, an emerging market analyst at Nomura International, said he saw the peak in CPI inflation at 6.8 percent this year and 6.6 percent next year from 7 percent and 6.7 percent, respectively. He said this inflation print, while caused by very specific items with the wider basket still showing some upside inflation risks, offered the Reserve Bank a little room to pause at the next meeting.
However, Montalto said the key deciding factor would be the expectations data from the Bureau for Economic Research before the meeting.
“If that shows inflation expectations becoming more unanchored, then a hike would still be likely and vice versa. With the Brexit referendum… the next meeting is still very much up in the air… As with the last meeting, we think it will very much come down to the line. For now, we just highlight that the probabilities have skewed towards rates remaining unchanged,” he said.
Sanisha Packirisamy, an economist at MMI Investments and Savings, said she expected core inflation to track marginally higher over upcoming months, but to remain below the upper target band. “Even after taking today’s positive surprise on inflation into account, we expect inflation pressures to build towards year-end on the back of higher food prices and pass-through from previously unfavourable currency movements.”
She said potential currency shocks and wage cost pressures provided significant upside risks to the inflation trajectory, which was expected to remain outside the target band in upcoming quarters.
“Moreover, inflation expectations (business and trade unions in particular) remain stubbornly high, posing a threat to second-round inflation pressures. In addition, a still elevated current account deficit and recent comments by the Reserve Bank, suggesting monetary policy remains highly accommodative, suggest a further 25 basis points hike later this year is still likely.”
She said the central bank was unlikely to do more in response to subdued growth expectations and depressed confidence levels pointing to a shallow growth recovery.
* With additional reporting by Reuters
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