Inflation up but rate hike unlikely

Published Jul 19, 2018

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JOHANNESBURG - South Africa's consumer inflation accelerated slightly in June as the weaker rand continued to exert upward pressure on fuel prices, but remained within the mid-target range of the SA Reserve Bank (Sarb) – quelling fears of a possible rate hike. 

Data from Statistics South Africa (StatsSA) yesterday showed that inflation rose 0.2 percent to 4.6 percent last month from 4.4 percent in May, with low food prices offsetting the effects of the higher fuel price. 

Economists, however, said that the slight increase was unlikely to sway Sarb’s hand into undue hawkishness when its Monetary Policy Committee (MPC) delivers its interest rates decision this afternoon. 

Investec’s Lara Hodes said that the market expected no change in the repo rate as the outlook remained relatively flat in the immediate term. Hodes said that the MPC would be more concerned with oil prices and the rand’s exchange rate against the dollar. 

“We estimate that the longterm structural inflation rate in South Africa is around 5.5 percent year on year and continue to forecast a 25basis point (bp) hike in the repo rate in January 2019, with another in March 2019 and a further 25bp lift in 2020 in order to return South Africa’s interest rates to neutral levels,” Hodes said. 

StatsSA said the transport price component, which rose from 5 percent in May to 7.3 percent year on year, was among the main reasons for the inflation acceleration. Food, rentals, vehicles and hotels categories reported the largest downside surprises, while inflation in public transport registered a higher-than-expected outcome during the period

Goods and services, however, rose 4.2 percent and 4.9 percent year on year, respectively. Elize Kruger, a senior economist at NKC African Economics, said yesterday that the inflation surprised on the downside, despite another month of hefty fuel price increases, which saw petrol and diesel prices rising 82 cents per litre and 85c per litre, respectively.

Kruger said the acceleration reflected benign underlying pricing pressures in the broader economy, but not enough to warrant a rate hike. “We forecast interest rates to remain unchanged at the current level for a prolonged period,” Kruger said. 

Last month the central bank decided to keep the repo rate unchanged at 6.5 percent, but flagged upside risks to the inflation outlook. Sarb also kept its forecast for gross domestic product growth unchanged at 1.7 percent for this year, but it changed the forecast for next year from 1.5 percent to 1.7 percent. 

PwC economist Christie Viljoen said he expected the committee to raise concerns over recent price and exchange rate developments. He said the Reserve Bank could revise lower its economic growth projections for 2018. 

Nedbank said in a note that inflation was expected to increase further in the coming months, with upward pressure likely to emanate from the residual effects of the increase in the VAT rate, higher fuel prices, an anticipated upturn in food prices and a mild depreciation in the value of the rand. 

But the bank said that while it expected inflation to increase, it did not foresee a rise to above the Reserve Bank’s 6 percent upper target range for inflation over the next three years. Nedbank said the relatively benign inflation outlook and the still weak economy was likely to convince the MPC to delay hiking rates for as long as possible. 

“We forecast that rates will remain unchanged for the rest of this year, before rising moderately late in 2019,” it said.

- BUSINESS REPORT 

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