SOUTH Africa's annual inflation rate breached the 5percent mark in July for the first time since September last year on the back of high fuel prices, bringing an interest rate hike into play.
Statistics South Africa (Stats SA) said yesterday that annual inflation accelerated to 5.1percent last month from 4.6percent in June and slightly above market expectations of a 5percent rise.
The Stats agency said the annual core inflation rate, which excludes cost of food, non-alcoholic beverages, petrol and energy, advanced to 4.3percent in July from 4.2percent in the previous month. Petrol prices grew at the fastest pace in six years in July as a result of higher global oil prices.
Yasemin Engin, an economist at Capital Economics, said while the rise in July's inflation figures added risk to the possibility of a rate hike this year, he expected that the SA Reserve Bank (Sarb) would keep policy on hold.
“Markets are pricing a rate hike in the fourth quarter of this year. We think this is unlikely, as the pass-through from the weakness in the rand is not very strong,” Engin said.
The Sarb at its July monetary policy committee (MPC) said it expected headline inflation to average 4.8percent this year, before increasing to 5.6percent in 2019 and decreasing again to 5.4percent in 2020.
Jason Muscat, an FNB senior economic analyst, said inflation was beginning to drift from the 4.5percent midpoint at which the central bank would like to see the rate anchored.
“While we don't believe the higher print will create too much discomfort among the MPC members, it may well necessitate bringing forward rate hike expectations to the first half of 2019 rather than in the second half,” Muscat said. The next statement of the MPC will be released on September 20.
Stats SA said significant drivers in inflation in the period under review were the housing and utilities component, which rose to 5.2percent in July on an annualised basis from 4.1percent in June.
The surge in electricity prices also saw administered price inflation rise to 12.4percent year-on-year, the highest number in more than eight years.
The inflation outlook has also come under pressure from the rand's recent falls against the US dollar. Domestic factors - notably the debate over land reform - have also sparked weakness in the local currency.
Lara Hodes, an economist at Investec, said she expected the central bank to commence its hiking cycle in January.
“Since the last MPC meeting, the effective rand has lost around 6percent of its value, and if this worsens in the run-up to the September MPC meeting, Sarb’s tone will likely turn hawkish,” Hodes said.